These are different types of financial markets which serve different investing purposes of the investors. The fundamental difference between these markets is the timeline of maturity of the instruments traded in both the markets.
The Capital Market
In Capital market, the participants trade in long-term financing instruments. It serves a purpose of long-term capital requirement of the firms and the types of instruments traded in the market are equity shares, bonds, debentures, preference shares, etc. with a maturity period of more than 1-year. It involves stockbrokers, mutual funds, individual investors, commercial banks, stock exchanges, and many more. Liquidity element in this market is comparatively low and thus, risk is comparatively high. As the risk is high, the rewarding return is also high in capital market.
Capital markets are further classified into two types
- Primary market – Fresh issue/Initial issue of securities are offered in the public domain. IPO and FPO are examples of initial issue.
- Secondary market – An organised exchange where the securities of different companies are traded between the investors. NSE and BSE are the organised exchanges in India where the secondary trade happens.
The Money Market
It is the market where banks, individuals, financial institutions, money dealer and brokers trade in the Short-term debt instruments which can be redeemed within a period of 1-year. These debt instruments include Certificate of Deposits (CDs), Treasury Bills, Commercial Papers (CPs), Trade Credit, etc. Primary reason for existence of this market is to ensure there is enough cash-flow between institutions like corporations and governments. Borrowing and lending in this market mainly focuses on either financing for day to day operations of business or investing the extra cash that businesses have for a short span of time. It helps in the working capital requirements of businesses.
Trading is mostly done through over-the-counter i.e. there is negligible involvement of exchanges. It is important to note that as this market provides highly liquid debt instruments, the risk related to liquidity or default is very low compared to capital market instruments.