Question

Distinguish between money market and capital market.

Answer 1

S. No.	Basis	Money market	Capital market
1.	Meaning	A market where short term funds are borrowed and lent.	A market for borrowing and lending long term capital required by business enterprise.
2.	Term of Finance	It provides short term funds, in short term instruments where the maturity is measured in days, weeks, or months.	It is a market for long-term instruments which is measured in years.
3.	Instruments	The instruments dealt in the market are bills of exchange, treasury bills, banker’s acceptance, etc.	The instruments dealt in this market are bonds, debentures, equity shares and stock.
4.	Functions	Money market exists as a mechanism of liquidity adjustments, i.e. a link between the depositors and borrowers	Capital market functions as a link between the investors and entrepreneurs.
5.	Risk	The prices of these instruments do not fluctuate and they carry very low market risk.	The instruments are long term and subject to market fluctuations and so they carry very high financial and market risk.
6.	Institution	The commercial banks are the important institutions in the money market.	The stock exchange is an important institution in the Capital Market.
7.	Liquidity	With high trade volumes and low transaction costs, money market instruments are extremely liquid.	Compared to the money market, the capital market typically has less liquidity.
8.	Safety	Because of their short maturities and excellent credit quality, money market instruments are typically regarded as safe investments.	Depending on the issuer and securities type, investments in the capital market incur different levels of risk.