Question

(a) Distinguish between Capital Market and Money Market on the following basis: (i) Investment outlay (ii) Duration (iii) Safety

Accepted Answer

Difference between Capital Market and Money Market S.No. Basis Capital Market Money Market (i) Investment outlay Investment in the capital market does not necessarily require a huge financial outlay as the value of units of securities is generally low. Investment in money market requires huge sum of money as the instruments are quite expensive. (ii) Duration Capital market deals in medium and long- term securities such as equity shares and debentures. Money market instruments have a maximum tenure of one year, and may even be issued for a single day (iii) Safety The instruments are riskier both with respect to returns and principal repayment. The instruments are generally much safer with a minimum risk of default. Or Q (b). Give any three differences between Primary Market and Secondary Market. Difference between Primary Market and Secondary Market are: S.No. Primary Market Secondary Market 1. In the primary market, there is sale of securities by new companies or new issues of securities by existing companies In the secondary market, there is trading of existing shares only. 2. In primary market, securities are sold by the company to the investor directly In secondary market, ownership of existing securities is exchanged between investors. The company is not involved at all. 3. The flow of funds is from savers to investors, i.e. the primary market directly promotes capital formation. Enhances encashability (liquidity) of shares, i.e. the secondary market indirectly promotes capital formation. 4. Only buying of securities takes place in the primary market, securities cannot be sold there. Both the buying and the selling of securities can take place in the secondary market. 5. Prices are determined and decided by the management of the company. Prices are determined by demand and supply for the security. 6. It has no fixed geographical location. It is located at specified places.

Marking-scheme solution

More from Financial Markets

S.No.	Basis	Capital Market	Money Market
(i)	Investment outlay	Investment in the capital market does not necessarily require a huge financial outlay as the value of units of securities is generally low.	Investment in money market requires huge sum of money as the instruments are quite expensive.
(ii)	Duration	Capital market deals in medium and long- term securities such as equity shares and debentures.	Money market instruments have a maximum tenure of one year, and may even be issued for a single day
(iii)	Safety	The instruments are riskier both with respect to returns and principal repayment.	The instruments are generally much safer with a minimum risk of default.

S.No.	Primary Market	Secondary Market
1.	In the primary market, there is sale of securities by new companies or new issues of securities by existing companies	In the secondary market, there is trading of existing shares only.
2.	In primary market, securities are sold by the company to the investor directly	In secondary market, ownership of existing securities is exchanged between investors. The company is not involved at all.
3.	The flow of funds is from savers to investors, i.e. the primary market directly promotes capital formation.	Enhances encashability (liquidity) of shares, i.e. the secondary market indirectly promotes capital formation.
4.	Only buying of securities takes place in the primary market, securities cannot be sold there.	Both the buying and the selling of securities can take place in the secondary market.
5.	Prices are determined and decided by the management of the company.	Prices are determined by demand and supply for the security.
6.	It has no fixed geographical location.	It is located at specified places.