Question

Differentiate between 'Capital Market' and 'Money Market' on the basis of the following: (i) Investment outlay (ii) Liquidity (iii) Safety

Hint:

Remember: Money Market = High cost, high safety, high liquidity (short term). Capital Market = Low cost, higher risk, moderate liquidity (long term).

Answer 1

Correct Answer: 3

Step 1: Recall the two markets being compared.
The Capital Market deals in long-term financial instruments such as shares and debentures. The Money Market deals in short-term instruments such as Treasury Bills and Commercial Paper, typically with maturities of less than one year.
Step 2: Compare on the basis of Investment Outlay.
Money Market instruments are bought and sold in large denominations (for example, Treasury Bills are issued in units of Rs. 25,000 or more), so they require a very high investment outlay. Capital Market instruments like equity shares have a small face value (Rs. 10 or Rs. 100), making them affordable for small and retail investors. The Capital Market requires a lower investment outlay.
Step 3: Compare on the basis of Liquidity.
Money Market instruments are highly liquid because formal arrangements exist to convert them into cash quickly (for example, through institutions like the Discount Finance House of India). Capital Market instruments are also tradeable on stock exchanges, but converting them to cash takes comparatively more time. Hence, Money Market is more liquid than the Capital Market.
Step 4: Compare on the basis of Safety.
Money Market instruments carry a very low risk of default because they are short-term and are usually issued by government bodies or highly creditworthy institutions. Capital Market instruments carry higher risk, as returns are not guaranteed and the principal can also erode depending on market conditions. The Money Market is safer than the Capital Market.
Step 5: Organise the answer in a clear tabular logic.
Think of it this way: the Money Market is a short-term, safe, highly liquid, large-ticket market; the Capital Market is a long-term, riskier, somewhat less liquid, small-ticket market accessible to all.
Step 6: Summarise the three-point distinction.
(i) Investment Outlay: Money Market - High; Capital Market - Low. (ii) Liquidity: Money Market - Higher; Capital Market - Lower. (iii) Safety: Money Market - Safer (low default risk); Capital Market - Riskier (higher default risk).
\[ \boxed{ \text{Money Market: high outlay, more liquid, safer; Capital Market: low outlay, less liquid, riskier} } \]