Business StudiesCBSE Class 12 · Financial Markets

Money Market and Capital Market, Primary and Secondary (Class 12)

Updated 15 October 2026 · Fact-checked

A financial market creates and exchanges financial assets, linking savers with investors. The money market deals in short-term funds of up to one year; it is highly liquid, safe and low-return. The capital market deals in long-term funds through shares and debentures, and has two parts: the primary market for new issues and the secondary market for existing securities.

Notice that maturity splits the market in two, and only the capital market divides further into primary (new issues) and secondary (existing securities).

Illustration drawn for QuestionBuddy.

Understand Money Market and Capital Market

Scope note. NCERT dropped its Financial Markets chapter in 2022, but CBSE still prescribes Unit 10 for 2026-27. This page follows the syllabus text: financial market (concept), money market (concept only), capital market and its types, and the two distinctions.

Financial market. A market for the creation and exchange of financial assets (shares, debentures, bonds, bills). It brings together those with surplus funds (savers, mainly households) and those who need funds (businesses).

Four functions of a financial market.
1. Mobilisation of savings and channelling them into the most productive uses (allocative function).
2. Facilitating price discovery: prices of financial assets are set by demand (investors) and supply (firms).
3. Providing liquidity to financial assets: they can be sold and turned into cash easily.
4. Reducing the cost of transactions: information and a common platform save time, effort and money.

Financial markets are classified by the maturity of the assets: money market (up to one year) and capital market (more than one year).

Money market (concept only). The market for short-term funds with a maturity of up to one year. Instruments are highly liquid and safe, but the expected return is lower. Major participants are the Reserve Bank of India, commercial banks, financial institutions, mutual funds and large companies; individuals rarely take part directly because each deal involves large sums. Instruments to recognise: treasury bills, commercial paper, call money, certificates of deposit and commercial bills.

Capital market. The facilities and institutional arrangements through which long-term funds, both debt and equity, are raised and invested. Instruments: equity shares, preference shares, debentures, bonds.

Two types of capital market.

Primary market (new issues market): new securities are sold by a company to investors for the first time. It directly promotes capital formation.
Secondary market (stock exchange): existing securities are bought and sold among investors. It gives liquidity and marketability and promotes capital formation only indirectly.

Basis	Primary market	Secondary market
Securities	New	Existing
Transfer	Company → investor	Investor → investor
Capital formation	Directly	Indirectly
Price	Fixed by the company (management)	Determined by demand and supply
Place	No fixed place	A specific place: the stock exchange

Capital market vs money market.

Basis	Capital market	Money market
Participants	Financial institutions, banks, companies, foreign investors, retail investors	RBI, banks, financial institutions, large companies; individuals rarely
Instruments	Equity and preference shares, debentures, bonds	Treasury bills, commercial paper, call money, certificates of deposit, commercial bills
Investment outlay	Small: securities of low value	Large: huge sums per instrument
Duration	Medium and long term (over one year)	Short term (up to one year)
Liquidity	Liquid (through the stock exchange), but less	Highly liquid
Safety	Riskier (return and principal)	Safer
Expected return	Higher (dividends, capital gains)	Lower

Case cues. 'raised ₹500 crore by issuing new shares to the public' (primary market); 'sold her shares through a broker' (secondary market); 'a large company raised funds for 90 days through an unsecured promissory note' (money market, commercial paper); 'government borrowed for 91 days' (money market, treasury bill).

Money Market and Capital Market: key facts

Financial market: Creation and exchange of financial assets; links savers and investors; Allocative role.
Four functions: Mobilise and channel savings; price discovery; liquidity; lower transaction cost; Mnemonic: 'My Price Looks Low' (M-P-L-L).
Classification: Money market: up to 1 year; capital market: more than 1 year; Maturity decides.
Capital market types: Primary (new issues, direct capital formation); secondary (existing securities, liquidity); New vs used.
Seven bases (capital vs money): Participants; instruments; investment outlay; duration; liquidity; safety; expected return; Mnemonic: 'Please Include Investment Duration, Liquidity, Safety, Return'.

How to answer Money Market and Capital Market questions

This topic appears as 1-mark identification of market or instrument and 3-mark distinctions (capital vs money market, primary vs secondary market).

1For a market: check the period (up to a year = money market; longer = capital market).
2For capital market cases: new securities from the company = primary; existing securities between investors = secondary.
3For distinctions, write a table with at least three bases and both sides filled in.
4Name money market instruments only to recognise them; the syllabus asks for the concept only.
5Quote the case line before naming the market.

Money Market and Capital Market in real life

The idea, met in an everyday situation. Answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

Primary vs secondary market

Suppose a popular ice-cream company offers its shares to the public for the first time at ₹120 each, and your aunt applies and gets 100 shares. A month later she sells them to another investor through her broker for ₹150 each.

In which market did each transaction take place?

Try it first, then show the solutionSolution

First purchase: new shares, from the company: primary market.
Later sale: existing shares, investor to investor, at a price set by demand and supply: secondary market.

Answer: The first purchase was in the primary market (new issue; money went to the company). The sale was in the secondary market (stock exchange; money went to your aunt, not the company).

Memory hook: Primary: the company gets the money. Secondary: an investor does.

Why individuals rarely use the money market

Imagine your class wants to invest its trip fund of ₹40,000 for three months. A friend suggests 'just buy commercial paper'.

Why is this not practical?

Try it first, then show the solutionSolution

Money market deals involve large sums per instrument.
Participants are mainly the RBI, banks, institutions and large companies.

Answer: Money market instruments involve huge investment outlays, so individuals rarely take part directly; a small sum like ₹40,000 is better kept in a bank deposit.

Memory hook: The money market is a wholesale market.

Tricks to remember Money Market and Capital Market

Short memory aids. Say each one aloud once, then use it on a question the same day.

One-year line
Up to one year = money market; beyond one year = capital market.
Use it when: Classifying markets and instruments.
Safe, liquid, low
Money market: Safe, Liquid, Low return. Capital market: Riskier, less liquid, higher return.
Use it when: Distinction questions.
New car showroom vs used car market
Primary market is the showroom (new, from the maker); secondary market is the used-car market (existing, owner to owner).
Use it when: Primary vs secondary.

Money Market and Capital Market: solved examples

Ordered from board level to HOTS. Try each one before you open the solution.

Example 1: Market for one-year funds · 1 mark · MCQBoard level

Which market deals in funds with a maturity of up to one year?
(a) Primary market
(b) Secondary market
(c) Money market
(d) Capital market

Try it first, then show the solutionSolution

Short-term funds up to one year are dealt in the money market (1 mark).

Answer: (c) Money market

Example 2: Functions of a financial market · 3 marks · Short answerBoard level

'Without financial markets, household savings would lie idle, companies would not know what investors think their securities are worth, and investors could not sell easily when they need cash.' Explain the three functions of a financial market implied by this statement. (3 marks)

Try it first, then show the solutionSolution

Savings lying idle → mobilisation of savings and channelling them into productive uses (1 mark).
What securities are worth → price discovery (1 mark).
Selling easily for cash → providing liquidity (1 mark).

Answer: (1) Mobilisation of savings and channelling them into the most productive uses. (2) Facilitating price discovery: prices of financial assets are set by the demand of investors and the supply by firms. (3) Providing liquidity to financial assets: they can be sold and converted into cash easily. (A fourth function, reducing the cost of transactions, is not implied here.)

Example 3: Primary vs secondary on three bases · 3 marks · Short answerHarder board level

Distinguish between the primary market and the secondary market on the bases of securities, capital formation and price. (3 marks)

Try it first, then show the solutionSolution

One mark per basis, both sides.

Answer: (1) Securities: primary market deals in new securities; secondary market in existing securities. (2) Capital formation: primary market promotes it directly; secondary market indirectly (by giving liquidity). (3) Price: in the primary market it is fixed by the company; in the secondary market it is determined by demand and supply.

Example 4: Identify the market from a case · 4 marks · Short answerHarder board level

'Varun Power Ltd.' raised ₹300 crore by issuing new equity shares to the public. Separately, it raised ₹50 crore for 120 days by issuing unsecured promissory notes to banks and mutual funds. Identify the two markets used and give one feature of each. (4 marks)

Try it first, then show the solutionSolution

New equity shares to the public: capital market, primary market (1 + 1 marks).
120-day unsecured promissory notes: money market (commercial paper) (1 + 1 marks).

Answer: (1) Capital market (primary market): new securities issued directly to investors for long-term funds; it directly promotes capital formation. (2) Money market (commercial paper): short-term funds up to one year; instruments are highly liquid and safe but give lower returns; participants are banks, institutions and large companies.

Example 5: Where should she invest? · 4 marks · Short answerHOTS / competency

Suppose a retired teacher wants to invest ₹2 lakh for 10 years for higher returns, while a large company has ₹200 crore of surplus cash for 3 months and wants safety and liquidity. Recommend a market for each, using four bases of distinction. (4 marks)

Try it first, then show the solutionSolution

Teacher: capital market: long duration, small outlay possible, higher expected return (2 marks).
Company: money market: short duration, high liquidity, safety, large outlay (2 marks).

Answer: Teacher: capital market. Her horizon is long (more than a year), the investment outlay can be small, and expected returns are higher (dividends and capital gains), though with more risk. Company: money market. Its need is short term (up to one year), money market instruments are highly liquid and safe, and its large sum suits the big outlays typical of money market deals.

Example 6: Case study: a family's investments · 4 marks · Case-basedHOTS / competency

Read the following and answer:
(i) Meera bought new shares of 'Bharat Wind Ltd.' in its first public issue.
(ii) A month later, she sold half of them on the stock exchange at a higher price.
(iii) Her bank lent surplus funds to another bank overnight.
(iv) The Government of India borrowed for 91 days.
(a) Identify the market in each case. (2 marks)
(b) In which case did 'Bharat Wind Ltd.' receive money? Why? (1 mark)
(c) Which function of a financial market does (ii) show? (1 mark)

Try it first, then show the solutionSolution

(a) (i) primary; (ii) secondary; (iii) money market (call money); (iv) money market (treasury bill) (½ mark each).
(b) Only in (i): new issue, company to investor (1 mark).
(c) Providing liquidity (1 mark).

Answer: (a) (i) Primary market (capital market); (ii) secondary market (stock exchange); (iii) money market (call money); (iv) money market (treasury bill). (b) Only in (i), because in the primary market new securities pass from the company to investors; in (ii) the money went to Meera. (c) Providing liquidity to financial assets: Meera could convert her shares into cash easily.

Where students lose marks in Money Market and Capital Market

The slips examiners see most often, and what to write instead.

Mistake: Calling the stock exchange the primary market
Both are part of the capital market.
Wrong working
New issues are traded on the stock exchange, so it is the primary market.
Right working
The stock exchange is the secondary market for existing securities.
Do this: New = primary; existing = secondary.
Usually costs: 1 mark.
Mistake: Writing one-sided distinctions
Only one market is described.
Wrong working
Money market is short term.
Right working
Money market: up to one year; capital market: more than one year.
Do this: Always fill both columns.
Usually costs: ½ mark per basis.
Mistake: Explaining money market instruments in detail
The syllabus asks for the concept only.
Wrong working
Half a page on treasury bill auctions.
Right working
Concept, features and participants; instruments only to recognise.
Do this: Concept only.
Usually costs: Time lost.
Mistake: Saying the money market gives higher returns
Safety and return are confused.
Wrong working
Money market: safe and high return.
Right working
Money market: safe but low return; capital market: risky but higher return.
Do this: Safe pays less.
Usually costs: ½ to 1 mark.

Exam tips

Money and capital market items carried about 11 marks across six questions in the PYQ bank, including 3-mark questions in the 2026 board paper 66/5/1 (Q24(a)) and the 2025-26 sample paper (Q23(A)).
Learn both tables (capital vs money, primary vs secondary) with at least three bases each.
Financial Markets has no current NCERT chapter; answer from the CBSE syllabus scope.
Financial Management and Financial Markets together carry 15 of the 80 theory marks in 2026-27.

Practice questions on Money Market and Capital Market

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

Q1 · 1 mark · MCQBoard level
Call money is mainly used for:
(a) long-term loans to companies
(b) inter-bank borrowing and lending for very short periods
(c) buying equity shares in a new issue
(d) issuing debentures to the public
Hint
Repayable on demand; very short maturity.
Answer
(b) inter-bank borrowing and lending for very short periods
Q2 · 1 mark · Short answerBoard level
Define capital market. (1 mark)
Hint
Long-term funds, debt and equity.
Answer
The capital market consists of the facilities and institutional arrangements through which long-term funds, both debt and equity, are raised and invested.
Q3 · 3 marks · Short answerBoard level
Distinguish between capital market and money market on any three bases. (3 marks)
Hint
Seven bases.
Answer
Any three: (1) Duration: capital market, medium and long term; money market, up to one year. (2) Instruments: shares, debentures, bonds vs treasury bills, commercial paper, call money. (3) Liquidity: less vs highly liquid. (4) Safety: riskier vs safer. (5) Expected return: higher vs lower. (6) Investment outlay: small vs large. (7) Participants: retail investors included vs mainly RBI, banks and institutions.
Q4 · 2 marks · Short answerHarder board level
Why is the secondary market said to promote capital formation only indirectly? (2 marks)
Hint
Who receives the money?
Answer
In the secondary market, existing securities change hands between investors, so the company receives no new funds. It helps capital formation indirectly by giving securities liquidity and marketability, which makes investors more willing to buy new issues in the primary market.
Q5 · 2 marks · Short answerHarder board level
Who are the major participants in the money market, and why do individuals rarely take part? (2 marks)
Hint
Large deals.
Answer
The RBI, commercial banks, financial institutions, mutual funds and large companies (1 mark). Individuals rarely take part directly because money market deals involve very large sums (1 mark).
Q6 · 2 marks · Short answerHarder board level
Explain the allocative function of a financial market. (2 marks)
Hint
Savings to productive uses.
Answer
A financial market mobilises the savings of households and channels them into the most productive uses (businesses that can earn the best returns), so the economy's scarce funds are allocated efficiently.
Q7 · 1 mark · Assertion-reasonHarder board level
Assertion (A): Money market instruments are safer than capital market instruments.
Reason (R): Money market instruments have short maturity and are issued by financially strong institutions.
(a) Both A and R are true and R is the correct explanation of A.
(b) Both A and R are true but R is not the correct explanation of A.
(c) A is true but R is false.
(d) A is false but R is true.
Hint
Short and strong.
Answer
(a) Both A and R are true and R is the correct explanation of A.
Q8 · 2 marks · Short answerHarder board level
Distinguish between the primary and secondary market on the bases of transfer of securities and place. (2 marks)
Hint
Company to investor; fixed place.
Answer
Transfer: in the primary market securities move from the company to investors; in the secondary market from one investor to another. Place: the primary market has no fixed place; the secondary market operates at a specific place, the stock exchange.
Q9 · 3 marks · Short answerHOTS / competency
A student says, 'If the secondary market disappeared, companies would not care, since they get money only in the primary market.' Evaluate. (3 marks)
Hint
Liquidity encourages new investment.
Answer
The statement is wrong. Although companies receive money only in the primary market, investors buy new issues readily because they know they can sell later in the secondary market. Without it, securities would lose liquidity and marketability, investors would hesitate to subscribe, and companies would find it harder and costlier to raise capital. The secondary market also gives price discovery that helps price new issues.
Q10 · 3 marks · Short answerHOTS / competency
Suppose a mid-sized company finances the purchase of a new factory by repeatedly rolling over 90-day commercial paper. Analyse the risk using the features of the two markets. (3 marks)
Hint
Short-term funds for long-term assets.
Answer
Commercial paper is a money market instrument for short-term needs (up to one year). A factory is a long-term asset that should be financed from the capital market (shares, debentures, long-term loans). If money market conditions tighten or lenders refuse to roll over the paper, the company may be unable to repay every 90 days while the factory's cash flows come slowly, causing a liquidity crisis.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1.What is a financial market?Show answer
A market for the creation and exchange of financial assets, linking savers and investors.
2.Maturity of money market instruments?Show answer
Up to one year.
3.Name the two types of capital market.Show answer
Primary market and secondary market.
4.Which market directly promotes capital formation?Show answer
Primary market.
5.Name two money market instruments.Show answer
Any two: treasury bills, commercial paper, call money, certificates of deposit, commercial bills.
6.Which market is safer?Show answer
Money market.

Money Market and Capital Market: frequently asked questions

What is the difference between money market and capital market?

The money market deals in short-term funds of up to one year with safe, liquid, low-return instruments; the capital market deals in medium- and long-term funds through shares, debentures and bonds that are riskier but give higher returns.

What is the primary market?

The new issues market, where companies sell new securities to investors for the first time and so raise fresh capital.

Is Financial Markets in the 2026-27 Class 12 syllabus?

Yes. NCERT dropped the chapter in 2022, but CBSE still prescribes and assesses Unit 10 Financial Markets.

What are the functions of a financial market?

Mobilising savings and channelling them into productive uses, price discovery, providing liquidity and reducing transaction costs.