Consider the following statements on the distinction between the capital market and the money market:
(A) The main instruments traded in the capital market are equity shares, debentures, bonds and preference shares.
(B) Participation in the capital market is by and large undertaken by institutional participants such as the RBI and banks.
(C) The capital market deals in short term securities such as equity shares and debentures.
(D) Capital market instruments are riskier both with respect to returns and principal repayment.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → (A) and (D) only
(A) The main instruments traded in the capital market are equity shares, debentures, bonds and preference shares. — Correct. These are long-term instruments, so they belong to the capital market.
(B) Participation in the capital market is by and large undertaken by institutional participants such as the RBI and banks. — Incorrect. This is true of the money market. The capital market also has ordinary retail investors from the public, besides banks, companies and foreign investors.
(C) The capital market deals in short term securities such as equity shares and debentures. — Incorrect. The capital market deals in medium and long term securities. Short-term instruments of up to one year belong to the money market.
(D) Capital market instruments are riskier both with respect to returns and principal repayment. — Correct. Issuing companies may fail to perform as projected, and promoters may cheat investors. So both the return and the principal are at risk.
NCERT (Pre-rationalised Edition): “(i) Participants: The participants in the capital market are financial institutions, banks, corporate entities, foreign investors and ordinary retail investors from members of the public. Participation in the money market is by and large undertaken by institutional participants such as the RBI, banks, financial institutions and finance companies. Individual investors although permitted to transact in the secondary money market, do not normally do so.” “(ii) Instruments: The main instruments traded in the capital market are – equity shares, debentures, bonds, preference shares etc. The main instruments traded in the money market are short term debt instruments such as T-bills, trade bills reports, commercial paper and certificates of deposit.” “(iv) Duration: The 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.” “(vi) Safety: Capital market instruments are riskier both with respect to returns and principal repayment. Issuing companies may fail to perform as per projections and promoters may defraud investors. But the money market is generally much safer with a minimum risk of default. This is due to the shorter duration of investing and also to financial soundness of the issuers, which primarily are the government, banks and highly rated companies.” |