Money Market and Capital Market

Money Market
The financial system is the mechanism funds from surplus to deficit units through the various financial instruments include: treasury bills, corporate equities, debentures, certificate of deposits, government securities etc. The main purpose of these instruments is to collect scattered money and make funds available for investment or for payments. Some instruments are issued and traded for short-term in order to raise funds for the short period of time, usually less than one year. The market where the short term instruments such as treasury bills, certificate of deposits, money at call, inter bank transactions, commercial paper etc. are traded is known as money market. In other words money market refers to the totality of financial institutions which deal with the supply of and demand for short-term funds in the economy. The money market instruments are close substitute for money as they are highly liquid and easily marketable. The money is bought and sold in the money market. The main functions of money market are to provide short-term loans to government and the businessmen to meet their day to day requirements of the working capital, temporary funds to the speculators, and provide better opportunity for the commercial banks to utilize their funds for the short period of time. The money market provides opportunity for the banks and businessmen to utilize their extra funds which can be quickly converted into cash whenever necessary. It also enables banks to make up their unexpected needs for funds that they can obtain cheaply from the money market. London Money Market and Wall Street Money market in the USA are the two largest money markets with daily transactions of hundreds of billions of dollar every day.

Capital Market
The capital market incorporates the financial instruments with more than one year. It deals with the long term financial instruments like corporate equities, government bonds, and debentures. The long and medium-term investment funds are raised through the capital market instruments for meeting the fixed and working capital requirements of the industry or government. Main difference between the money and capital market is the maturity of the credit instruments used in the market. The former relates to the market instruments with less than one year whereas the4 later deals with the instruments used for raising medium and long-term credit from the market. Capital market plays vital role for meeting external finance need of the corporations. The corporations, instead of borrowing from the banks, can directly raise the external funds from the public and, in turn, give them share certificates which they can trade in the capital market and convert into cash. The capital market serves as a bridge to establish a link between savers and investors or surplus or deficit units of the economy. Moreover, capital market provides incentives to the savers in the form of dividends or interest which induce them to save more. In the context of Nepal, the development of modern capital market is relatively a new phenomenon. It is a small and underdeveloped by any standard. The shares of few listed companies are traded in the stock exchange, Nepal Stock Exchange Limited (NEPSE) which was established in 1993.