The money market is a market for short-term loans. The period of borrowing and lending in the money market is one year or less. On the other hand, the capital market is a market for long-term loans. It is a market in which funds are borrowed and lent for a period over one year. The two markets also differ in terms of the instruments they deal in. They money market deals in highly marketable liquid instruments such as the promissory note, the bill of exchange and the treasury bill etc. On the other hand, the capital market deals in common stocks, shares, debentures and bonds.
The money market is not a market in the usual sense of the term. It does not mean a single trading place or trading organization dealing in money. But it refers to “a network of markets that are ground together because they deal in financial instruments which have similar function in the economy and are to some degree substitutes from the point of view of holders.
“A market consisting of financial institutions and dealers in money and credit who either have to lend, or what to borrow money”
Institutions of Money Market
The central bank of the country is the pivot around which the entire money market revolves. It acts as the guardian of money market and increases or decreases the supply of money and credit in the interest of stability of the economy.
Commercial banks also deal in short-term loans, which they lend to business and trade. They discount bills of exchange and lend through advances and overdrafts.
Non-Bank Financial Intermediaries:
Besides the commercial banks, there are non-bank financial intermediaries, which lend short-term funds to borrowers in the money market. Such financial intermediaries are savings banks, investment houses, insurance, companies, pension, funds and other financial corporations.
Discount Houses and Bill Brokers:
In developed money markets, private companies operate discount houses where as bill brokers operate in under developed money market. Both discount houses and bill brokers act as intermediaries between borrowers and lenders by discounting bill of exchange at a nominal commission.
The institution of acceptance houses developed from the merchant’s banker who transferred their head quarters to the London Money Market in 19th century. They act as agents between exporters and importers or lender and borrower. They accept bills drawn on trader whose financial position is not strong in order to make the bills negotiable in money market. However, their importance has declined because the commercial banks have undertaken the acceptance business.
Specialized Financial Institutions:
Specialized financial institutions like agricultural banks and industrial banks etc. provide loan to difference sectors of the economy for development.