Question

Differentiate between ‘Capital Market’ and ‘Money Market’ on the basis of the following: (i) Investment outlay (ii) Liquidity (iii) Safety.

Hint:

Think of the "Money Market" as a place for "Short-term Cash Management" and the "Capital Market" as a place for "Long-term Wealth Creation."

Answer 1

Step 1: Understanding the Concept:
The financial market is categorized based on the tenure of the instruments traded. Money market deals in short-term funds, while Capital market deals in long-term funds.
Step 2: Detailed Explanation:
\begin{tabular}{|l|p{5cm}|p{5cm}|} \hline Basis & Money Market & Capital Market
\hline Investment Outlay & Entails huge financial outlay as instruments are expensive (e.g., T-bills have a minimum of 25,000). & Investment is lower as the unit value of securities is small (e.g., shares of 10 or 100).
\hline Liquidity & High degree of liquidity as there is a formal arrangement for discount/active secondary market. & Comparatively less liquid, though shares are traded, they may not always find a buyer immediately.
\hline Safety & Generally much safer with minimum risk of default due to short duration and sound financial standing of issuers. & Riskier both with respect to returns and principal repayment due to market fluctuations.
\hline \end{tabular}
Step 3: Final Answer:
Money market is characterized by high outlay and high safety, while Capital market offers lower entry costs but higher risk and variable liquidity.