There is one major difference between M1 and M2. The main difference is that M1 is a more limited and more liquid type of money. More types of money are included in M2, but they are less liquid than those included in M1.
Different kinds of money can be more or less liquid. This means that they can be more or less usable for buying goods and services. For example, cash and deposits in checking accounts are extremely liquid. These, along with travelers’ checks (which used to be a more important form of money) make up M1.
M2 includes all of M1. However, it also includes other, less liquid, forms of money. This includes such things as deposits in savings accounts, money market accounts, and money market mutual funds. It also includes money in certificates of deposit (CDs). These types of money are relatively liquid, but are slightly more difficult to actually use than the money in M1 is.
Thus, the major difference between these two is that M1 is more liquid while M2 includes more kinds of money but is less liquid.