Money market is distinguished from capital market on the basis of the maturity period, credit instruments and the institutions:
1. Maturity Period:
The money market deals in
the lending and borrowing of short-term finance (i.e., for one year or less),
while the capital market deals in the lending and borrowing of long-term
finance (i.e., for more than one year).
2. Credit Instruments:
The main credit
instruments of the money market are call money, collateral loans, acceptances,
bills of exchange. On the other hand, the main instruments used in the capital
market are stocks, shares, debentures, bonds, securities of the government.
3. Nature of Credit Instruments:
The credit instruments
dealt with in the capital market are more heterogeneous than those in money
market. Some homogeneity of credit instruments is needed for the operation of
financial markets. Too much diversity creates problems for the investors.
4. Institutions:
Important institutions
operating in the' money market are central banks, commercial banks, acceptance
houses, nonbank financial institutions, bill brokers, etc. Important institutions
of the capital market are stock exchanges, commercial banks and nonbank
institutions, such as insurance companies, mortgage banks, building societies,
etc.
5. Purpose of Loan:
The money market meets
the short-term credit needs of business; it provides working capital to the
industrialists. The capital market, on the other hand, caters the long-term
credit needs of the industrialists and provides fixed capital to buy land,
machinery, etc.
6. Risk:
The degree of risk is
small in the money market. The risk is much greater in capital market. The
maturity of one year or less gives little time for a default to occur, so the
risk is minimised. Risk varies both in degree and nature throughout the capital
market.
7. Basic Role:
The basic role of money
market is that of liquidity adjustment. The basic role of capital market is
that of putting capital to work, preferably to long-term, secure and productive
employment.
8. Relation with Central Bank:
The money market is
closely and directly linked with central bank of the country. The capital
market feels central bank's influence, but mainly indirectly and through the
money market.
9. Market Regulation: