Capital Markets and Money Markets are the two terms widely discussed in financial economics. Both the capital market and the money market aim to raise money, but they differ in nature.
What is the Capital Market?
The capital market is a financial market where long-term financial instruments such as stocks, bonds, and debentures are traded. These instruments have a maturity period of more than one year.
Purpose of Capital Market
Its main purpose is to help individuals, companies, and governments raise long-term funds for investment and development projects.
Main Features:
- Deals with long-term investments.
- Provides a platform for companies to raise capital by issuing shares or bonds.
- Returns are generally higher but come with greater risk.
- Plays a key role in economic development by mobilizing savings into productive investments.
Types of Capital Market
- Primary Market – Where new securities are issued (e.g., IPOs).
- Secondary Market – Where already issued securities are traded (e.g., stock exchanges).
Examples:
- Buying and selling of company shares on the Nepal Stock Exchange (NEPSE). In case of Nepal, Nepal Stock Exchange (NEPSE) is a secondary market where stock trading is carried out.
- Trading of corporate and government bonds.
What is Money Market
The money market is a segment of the financial market where short-term financial instruments with high liquidity and maturities of less than one year are traded.
Purpose of Money Market
It helps businesses, banks, and governments manage their short-term cash needs and maintain liquidity.
Main Features:
- Deals with short-term funds.
- Instruments are low risk and highly liquid.
- Helps in maintaining stability in the financial system.
- Controlled mainly by central banks like Nepal Rastra Bank (NRB).
Common Instruments:
- Treasury Bills (T-bills) – Issued by governments.
- Commercial Papers – Issued by companies.
- Certificates of Deposit (CDs) – Issued by banks.
- Call/Notice Money – Very short-term borrowing between banks.
Examples:
- NRB issuing 91-day Treasury Bills to manage the money supply.
- Banks lend to each other overnight in the interbank market.
Here is a feature-wise comparison between the money market and the capital market.
| Feature | Capital Market | Money Market |
|---|---|---|
| Definition | Market for buying and selling long-term securities (stocks, bonds). | Market for short-term debt instruments (maturity < 1 year). |
| Purpose | To raise long-term funds for businesses and governments. | To provide liquidity and manage short-term funding needs. |
| Instruments | Stocks, corporate bonds, government bonds, debentures, equity shares. | Treasury bills, commercial papers, certificates of deposit, call money, and repurchase agreements. |
| Maturity Period | More than 1 year (medium to long term). | Less than 1 year (typically 1 day to 1 year). |
| Risk Level | Generally higher risk due to longer duration and market fluctuations. | Lower risk, safer investments due to short duration. |
| Returns | Higher returns due to higher risk and longer lock-in. | Lower returns but more liquid and safer. |
| Participants | Investors include individuals, mutual funds, pension funds, companies, and the government. | Banks, financial institutions, corporations, and government treasuries. |
| Regulation | Heavily regulated by securities authorities (e.g., SEBON in Nepal). | Regulated by central banks and monetary authorities. (NRB) |
| Role in the Economy | Facilitates capital formation and long-term economic growth. | Helps manage liquidity, cash flow, and short-term credit needs. |
Quick Summary:
- Capital Market: Long-term investment, higher risk, and returns.
- Money Market: Short-term borrowing/lending, lower risk, more liquidity.