Money vs Capital Markets: Key Differences and Functions

Posted on Mar 20, 2026 in Economy

Money Market vs. Capital Market

Money Market

Deals with short-term credit instruments (not exceeding one year).
Major players include commercial banks, RBI, LIC, GIC, and UTI.
Instruments include Treasury Bills, Commercial Paper, and call money.
Supplies working capital for short periods.
Instruments enjoy high liquidity and low risk.
Investors generally cannot expect high returns.
Instruments are of high value; transactions occur via phone or internet.
Regulated by the RBI.

Capital Market

Deals with long-term finance.
Major players include merchant bankers, financial institutions, and investors.
Deals with shares, debentures, bonds, and government securities.
Supplies fixed capital for business and government.
Instruments have lower liquidity compared to the money market.
Higher risk regarding returns and principal repayment.
Investors can earn higher returns through dividends.
Face value of securities may be low; regulated by SEBI.

Primary vs. Secondary Markets

Primary Market

Concerned with the issue of new shares.
Enables companies to sell securities directly or through intermediaries.
Directly connected to capital formation.
Allows management to determine security values; no fixed location.

Secondary Market

Concerned with the marketing of existing shares.
Helps holders exchange securities; indirectly connected to capital formation.
Enables buying and selling at specific locations.
Price is determined by market demand and supply.

The Stock Exchange

A stock exchange is an organized secondary market where listed securities are traded. It ensures fair pricing through members like commission brokers and jobbers. The Securities and Exchange Board of India (SEBI) regulates these activities to protect investor interests.

Definitions

Securities Contracts (Regulation) Act, 1956: An association or body of individuals established to assist, regulate, and control business in dealing with securities.
Pyle: Marketplaces where listed securities are bought and sold for investment or speculation.

Market Speculators: Bulls vs. Bears

Bull (Tejiwala): A speculator who expects prices to rise. They buy securities to sell at a higher price later. They are on the “long side” of the market.
Bear (Mandiwala): A speculator who expects prices to fall. They sell securities they may not possess (short selling) to buy them back later at a lower price for profit.

SEBI: Functions and Powers

Functions

SEBI acts in three capacities: quasi-legislative (drafting regulations), quasi-judicial (passing rulings), and quasi-executive (investigation and enforcement).

Educates investors and trains intermediaries.
Controls stock exchanges and registers brokers/merchant bankers.
Regulates mutual funds and collective investment schemes.
Conducts audits and restricts insider trading.

Powers

Approving and amending stock exchange by-laws.
Inspecting books of accounts of financial intermediaries.
Mandating companies to list shares on recognized exchanges.

Objectives of Special Economic Zones (SEZ)

Generation of additional economic activity and export promotion.
Attracting domestic and foreign investment.
Creation of employment and infrastructure development.
SEZ units may import capital goods duty-free and are treated as foreign territory for trade.