Question

Differentiate between ‘Capital Market’ and ‘Money Market’ on the basis of the following : (i) Participants, (ii) Instruments, (iii) Duration.

• A. Subjective/Descriptive Question
• B. Not Applicable
• C. Not Applicable
• D. Not Applicable

Hint:

To remember the distinction easily, remember that the Money Market is a wholesale market for short-term, low-risk liquid debt where major financial institutions interact, whereas the Capital Market is an investment ecosystem where retail and corporate funds are directed into long-term wealth assets like equity and debentures.

Answer 1

The Correct Option is A

Concept: The financial market is broadly divided into two major components based on the maturity period of the instruments traded and the nature of institutional setups: the Money Market and the Capital Market. The Money Market deals with short-term funds, while the Capital Market caters to long-term financing requirements. Step 1: Detailed Comparison on the basis of Participants
The nature of buyers and sellers in these markets differs significantly due to risk factors and capital investment sizes:

• Money Market: The participants in this market are predominantly large, highly institutionalized entities. It involves institutional players such as the Reserve Bank of India (RBI), Commercial Banks, Financial Institutions, Public Sector Undertakings (PSUs), Mutual Funds, and large corporate houses. Individual retail public participation is highly limited due to the massive ticket size of the transactions.

• Capital Market: This market features a highly diverse set of participants. It includes individual retail investors from the general public, domestic corporate bodies, stockbrokers, Commercial Banks, Development Financial Institutions (like IDBI, IFCI), Mutual Funds, and Foreign Institutional Investors (FIIs) / Foreign Portfolio Investors (FPIs).

Step 2: Detailed Comparison on the basis of Instruments
The type of assets used to raise funds varies based on legal and structural formats:

• Money Market: The instruments traded here are short-term debt instruments that are highly liquid and carry low default risk. They are often called close substitutes for money. Prominent examples include Treasury Bills (T-Bills), Commercial Paper (CP), Certificates of Deposit (CD), Call Money, and Commercial Bills.

• Capital Market: The instruments here comprise both equity-based and long-term debt securities. Key instruments include Equity Shares, Preference Shares, Debentures, Corporate Bonds, and Government Bonds/Securities (G-Secs).

Step 3: Detailed Comparison on the basis of Duration
The maturity schedule forms the foundational difference between the two markets:

• Money Market: This market deals exclusively with financial assets that have a short-term maturity period. The duration of investment typically ranges from a minimum of one day up to a maximum of one year.

• Capital Market: This market caters to medium and long-term capital requirements. The maturity duration of the instruments traded here is greater than one year, and in the case of equity shares, it can extend indefinitely (perpetual maturity).
tabular|p2.5cm|p5.5cm|p5.5cm| Basis of Distinction & Money Market & Capital Market
(i) Participants & RBI, commercial banks, financial institutions, mutual funds, large corporates. Very limited retail public. & Retail investors, corporate bodies, brokers, financial institutions, mutual funds, and foreign institutional investors (FIIs).
(ii) Instruments & Treasury Bills, Commercial Paper, Certificates of Deposit, Call Money, and Commercial Bills. & Equity Shares, Preference Shares, Debentures, Corporate Bonds, and long-term Government Securities.
(iii) Duration & Short-term funds; ranging from 1 day up to a maximum period of 1 year. & Medium and long-term funds; maturity period always exceeds 1 year.
tabular