Money Market Vs. Capital Market:An Overview
The money market and the capital market are not single institutions but two broad components of the global financial system.
- The money market is the trade in short-term debt. It is a constant flow of cash between governments, corporations, banks, and financial institutions, borrowing and lending for a term as short as overnight and no longer than a year.
- The capital market encompasses the trade in both stocks and bonds. These are long-term assets bought by financial institutions, professional brokers, and individual investors.
Together, the money market and the capital market comprise a large portion of what is known as the financial market.
The Money Market
The money market is a good place for individuals, banks, other companies, and governments to park cash for a short period of time, usually one year or less. It exists so that businesses and governments that need cash to operate can get it quickly at a reasonable cost, and so that businesses that have more cash than they need can put it to use.
Key Takeaways
- The money market is a short-term lending system. Borrowers tap it for the cash they need to operate from day to day. Lenders use it to put spare cash to work.
- The capital market is geared toward long-term investing. Companies issue stocks and bonds to raise money to grow their businesses. Investors buy them to share in that growth.
- The money market is less risky than the capital market while the capital market is potentially more rewarding.
The returns are modest but the risks are low. The instruments used in the money markets include deposits, collateral loans, acceptances, and bills of exchange. Institutions operating in the money markets include the Federal Reserve, commercial banks, and acceptance houses.
When a company or government issues short-term debt, it'susually to cover routine operating expenses or supply working capital, not for capital improvements or large-scale projects.
About Liquidity
The money market plays a key role in ensuringthat banks, other companies, and governments maintain the appropriate level of liquidity on a daily basis, without falling short and needing a more expensive loan and without hoarding excess cash that isn't earning interest.
Individual investors may use the money markets to invest their savings in a safe and accessible place. Many choices are available, including mutual funds that focus on state money market funds, municipal funds, and U.S. Treasury funds. Many of the government funds are tax-free. A money-market fund also can be opened at most banks.
The Capital Market
The capital market is where stocks and bonds are traded. Its movements from hour to hour are constantly monitored and analyzed for clues as to the health of the economy at large, the status of every industry in it, and the consensus for the short-term future.
The overriding goal of the companies institutions that enter into the capital markets is to raise money for their long-term purposes, which usually come down to expanding their businesses and increasing their revenues. They do this by issuing stock shares and by selling corporate bonds.
Primary and Secondary
The capital market is roughly divided into a primary market and a secondary market. A company that issues a round of stock or a new bond places it in the primary market for sale directly to investors or institutions. If and when those buyers decide to sell their shares or bonds, they do so on the secondary market. The original issuer of those stocks or bonds does not immediately benefit from their resale, although companies certainly have an interest in the price of their stock shares rising over time.
The capital market is by nature riskier than the money market and has greater potential gains and losses.
What are four examples of money market instruments?
Examples of money market instruments include certificates of deposit (CDs), commercial paper, Treasury bills (T-bills), and banker's acceptances.
What are the types of capital markets?
Capital markets can be broken down into primary and secondary markets. The primary market is where stocks and bonds are first issued to investors. The secondary market, on the other hand, is where securities that have already been issued are traded between investors.
What are 3 types of capital market?
Capital markets can include the stock market, the bond market, and the forex market. Each of these markets trade a different asset class.
The Bottom Line
The money market and capital market are often talked about. Together, they make up a large chunk of the global financial market.
The money market is where short-term financial instruments with a holding period of a year or less are traded. It essentially works as a short-term lending and borrowing platform for its participants, with investors in this market either gaining access to funds or earning interest on them. The capital market is also a venue where people make money but has different characteristics. In this market, there are entities that issue shares, bonds, or other long-term securities to raise capital and grow their businesses, and those who invest in these instruments, hoping to turn a profit.
The key distinguishing factors are time and rewards. Money markets are made up of short-term investments carrying less risk, whereas capital markets are more geared toward the longer term and offer greater potential gains and losses.
FAQs
The key distinguishing factors are time and rewards. Money markets are made up of short-term investments carrying less risk, whereas capital markets are more geared toward the longer term and offer greater potential gains and losses.
What is the difference between money and capital markets quizlet? ›
Capital markets are markets in which money is lent for periods longer than a year, while money markets are markets in which money is lent for periods of less than a year.
What is the difference between money and capital? ›
Capital is a much broader term that includes all aspects of a business that can be used to generate revenue and income, i.e., the company's people, investments, patents, trademarks, and other resources. Money is what's used to complete the purchase or sale of assets that the company employs to increase its value.
What is the difference between money market and capital market SlideShare? ›
It defines money markets as dealing with short-term lending of less than one year, for instruments with high liquidity. Capital markets deal with longer-term bonds and equities. Money market instruments include treasury bills, commercial bills, certificates of deposit, and repurchase agreements.
Is the money market not a secondary aspect of the capital market True or false? ›
Answer False. Capital markets refer to those markets that deal with long term securities having a maturity of one year or more. Money market is the market where short term debt is traded. Capital market is the market where long term assets like stocks and bonds are traded.
What are the difference between money market and capital market answer? ›
The key distinguishing factors are time and rewards. Money markets are made up of short-term investments carrying less risk, whereas capital markets are more geared toward the longer term and offer greater potential gains and losses.
What is the difference between financial markets and capital markets? ›
Financial markets encompass a broad range of venues where people and organizations exchange assets, securities, and contracts with each other. They're often secondary markets. Capital markets are used primarily to raise funding to be used in operations or for growth, usually for a firm.
What is the difference between real capital and money capital? ›
Fictitious capital contrasts with what Marx calls "real capital", which is capital actually invested in physical means of production and workers, and "money capital", which is actual funds being held.
What is money market and examples? ›
Money markets include markets for such instruments as bank accounts, including term certificates of deposit; interbank loans (loans between banks); money market mutual funds; commercial paper; Treasury bills; and securities lending and repurchase agreements (repos).
What is the difference between funds and capital? ›
Answer: Capital is source of funds, while investment is deployment of funds. Capital shown in the liabilities side of the balance sheet, but Investment shown the assest side of the balance sheet. ... Capital account represent the paid up capital of share, reserve and surplus.
The money market is where you'll find short-term securities, typically with a maturity period of one year or less, being traded. In the capital market, maturity periods are usually not fixed, meaning there's no specified time frame.
What is money and capital market in economics? ›
Money markets are where securities with less than one year to maturity are traded, while capital markets are where securities with more than one year are traded. Commercial paper and Treasury bills are some of the most common money market instruments.
What is the difference between money market and currency market? ›
In the currency market, a foreign exchange transaction invariably deals with two kinds of money. Whereas in the money market, typically a loan business, only involves one kind of money. Another difference between the currency market and the money market lies in the function of the respective markets.
What is the main difference between money markets and capital markets quizlet? ›
The difference comes down to maturities: - Money Market instruments are investments with maturities of 12 months or less. - Capital Market Instruments are long term and have maturities of more than 12 months or no maturity at all (such as common stock).
What is the difference between money market and secondary market? ›
Key takeaways. The primary market is where new securities (stocks, bonds, etc.) are issued and sold for the first time, typically through initial public offerings (IPOs). The secondary market, on the other hand, is where already issued securities are bought and sold by investors.
What is the primary focus of the money market? ›
The money market is a crucial financial market segment where short-term borrowing and lending of funds occur. It facilitates the smooth functioning of the economy by providing a platform for participants to meet their immediate cash needs and manage liquidity.
What are money markets markets for quizlet? ›
Money markets are markets for short-term debt securities such as Treasury bills and commercial paper.
How does the location of money markets differ from that of capital markets? ›
The capital markets are more likely to be characterized by actual physical locations such as the New York Stock Exchange or the American Stock Exchange. Money market transactions are more likely to occur via telephone, wire transfers, and computer trading.
What is traded in capital markets? ›
Capital markets are financial markets that bring buyers and sellers together to trade stocks, bonds, currencies, and other financial assets. Capital markets include the stock market and the bond market. They help people with ideas become entrepreneurs and help small businesses grow into big companies.
Is commercial paper traded in the capital market? ›
The world of fixed-income securities can be divided into two main categories: capital markets and money markets. Capital markets consist of securities with maturities of more than 270 days, while money markets consist of securities with maturities of 270 days or less, the latter of which commercial paper falls into.
