Question

Differentiate between ‘Capital Market’ and ‘Money Market’ on the basis of the following :

(i) Liquidity

(ii) Safety

(iii) Expected Return

Hint:

Compare the two markets point by point. The capital market is less liquid and riskier but gives a higher return than the money market.

Answer 1

Step 1: Difference on the basis of liquidity:
Capital market: securities are considered less liquid. It can take time and effort to sell them at a good price, especially for long-term bonds.
Money market: instruments enjoy a higher degree of liquidity because there is a formal arrangement for their sale and for their buyback.

Step 2: Difference on the basis of safety:
Capital market: the instruments are riskier, both for the return and for the repayment of the principal. Share prices can fall sharply.
Money market: the instruments are generally much safer, as the risk of default is minimal. Many of them are issued by the government or by big banks.

Step 3: Difference on the basis of expected return:
Capital market: investment in capital market securities generally gives a higher return to the investor, as the investor takes more risk and waits longer.
Money market: the instruments give lower returns than the capital market.

Final Answer:
Compared with the money market, the capital market is less liquid, less safe and gives a higher expected return.