Difference between money market and capital market

brief overview of money market and capital market

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Assignment on


Comparison between Money market and Capital Market


x
th Semester
By
Faizan Akhtar MBAP-F13-1X
Faisal Saeed MBAP-F13-1X
Hina Shaheen MBAP-F13-1X
Ammara Ch MBAP-F13-1X

MASTERS IN BUSINESS ADMINISTRATION
Faculty of Management Sciences
THE SUPERIOR UNIVERSITY LAHORE

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Money Market:
The short term debts and securities sold on the money markets which are known as money market
instruments have maturities ranging from one day to one year and are extremely liquid. Treasury
bills, federal agency notes, certificates of deposit, commercial paper, bankers' acceptances, and
repurchase agreements are examples of instruments. The suppliers of funds for money market
instruments are institutions and individuals with a preference for the highest liquidity and the lowest
risk.
Money Market is unsystematic market and so the trading is done off exchange, i.e. Over The Counter
between two parties by using phones, email, fax, online, etc. It plays an important role in the
circulation of short term funds in the economy. It helps the industries to fulfill their working
capital requirement.

Capital Market:
A type of financial market where the government or company securities are created and traded for
the purpose of raising long term finance to meet the capital requirement is known as Capital Market.
The securities which are traded includes stocks, bonds, debentures, euro issues, etc. whose maturity
period is not limited up to one year or sometimes the securities are irredeemable (no maturity). The
market plays a revolutionary role in circulating the capital in the economy between the suppliers
of money and the users. The Capital Market works under full control of Securities and Exchange
Board to protect the interest of the investors.
The Capital Market includes both dealer market and auction market. It is broadly divided into two
major categories: Primary Market and Secondary Market.
 Primary Market: A market where fresh securities are offered to the public for subscription
is known as Primary Market.
 Secondary Market: A market where already issued securities are traded among investors is
known as Secondary Market.

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Basis for
Comparison
Money Market Capital Market
Definition

Is a component of the financial markets
where short-term borrowing takes place.
Is a component of financial markets where
long-term borrowing takes place.
Time
Period

The money market make an agreement for
borrowing and lending of short term funds
which shows time period is one year or
less than one year.
The capital market compact in borrowing and
lending of long term funding which means
the time period is more than one year.
Credit
Instruments
Certificate of deposit, Repurchase
agreements, Commercial paper, Federal
funds, Municipal notes, Treasury bills,
Money funds, Foreign Exchange Swaps,
short-lived mortgage, Eurodollar deposit,
and asset-backed securities.
Stocks, Shares, Debentures, bonds, Securities
of the Government.
Nature of
Credit
Instruments
Homogenous. A lot of variety causes
problems for investors.
Heterogeneous. A lot of varieties are required.
Purpose of
Loan
Short-term credit required for small
investments.
Long-term credit required to establish
business, expand business or purchase fixed
assets.
Basic Role Liquidity adjustment Putting capital to work
Institutions Central banks, Commercial banks,
Acceptance houses, Nonbank financial
institutions, Bill brokers, etc.
Stock exchanges, Commercial banks and
Nonbank institutions, such as Insurance
Companies, Mortgage Banks, Building
Societies, etc.
Risk In money market, risk factor is very small
because time period is less than one year is
given so defaulter have less time to default
that's way the risk is minimized.
In capital market, the risk is more as compare
to in money market. the reason behind this is
the time period. the maturity of more than one
year provides more time for default. but in
capital market risk is differs both in nature
and degree.
Market
Regulation
Commercial banks are closely regulated to
prevent occurrence of a liquidity crisis.
Institutions are regulated to keep them from
defrauding customers.
Relation
with
Central
Bank
Closely related to the central banks of the
country.
Indirectly related with central banks and feels
fluctuations depending on the policies of
central banks.
Return on
Investment
There is return on investment is less. On the other hand comparatively high.
Merit Increases liquidity of funds in the
economy.
Mobilization of Savings in the economy.

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Conclusion:
The main aim of the financial market is to channelize the money between parties in which Money
Market and Capital Market helps by taking surplus money from the lenders and giving them to the
borrower who needs it. Millions of transactions take place around the world on a daily basis.
Both of them work for the betterment of the world economy. They fulfill the long term and short
term capital requirements of the individual, firms, corporate and government. They provide good
returns which encourages investments.