Capital Market And Money Market
The major points of distinction between the two markets are as follows:
- Participants:
- The participants in the capital market are financial institutions, banks, corporate entities, foreign investors and ordinary retail investors from members of the public.
- Participation in the money market is by and large undertaken by institutional participants such as the RBI, banks, financial institutions, and finance companies. Individual investors although permitted to transact in the secondary money market, do not normally do so.
- Instruments:
- The main instruments traded in the capital market are – equity shares, debentures, bonds, preference shares, etc.
- The main instruments traded in the money market are short term debt instruments such as T-bills, trade bills reports, commercial paper and certificates of deposit.
- Investment Outlay:
- Investment in the capital market i.e. securities does not necessarily require a huge financial outlay. The value of units of securities is generally low i.e. Rs 10, Rs 100 and so is the case with a minimum trading lot of shares which is kept small i.e. 5, 50, 100 or so.
This helps individuals with small savings to subscribe to these securities.
- In the money market, transactions entail huge sums of money as the instruments are quite expensive.
- Duration:
- The capital market deals in medium and long term securities such as equity shares and debentures.
- Money market instruments have a maximum tenure of 364 days, and may even be issued for a single day.
- Liquidity:
- Capital market securities are considered liquid investments because they are marketable on the stock exchanges. However, a share may not be actively traded, i.e. it may not easily find a buyer.
- Money market instruments, on the other hand, enjoy a higher degree of liquidity as there is a formal arrangement for this. The Discount Finance House of India (DFHI) has been established for the specific objective of providing a ready market for money market instruments.
- Safety:
- Capital market instruments are riskier both with respect to returns and principal repayment. Issuing companies may fail to perform as per projections and promoters may defraud investors.
- But the money market is generally much safer with a minimum risk of default. This is due to the shorter duration of investing and also to the financial soundness of the issuers, which primarily are the government, banks and highly rated companies.
- Expected return:
- The investment in capital markets generally yields a higher return for investors than the money markets.
- The possibility of earnings is higher if the securities are held for a longer duration. First, there is the scope of earning capital gains in equity share.
Second, in the long run, the prosperity of a company is shared by shareholders by way of high dividends and bonus issues.