On the capital market, people buy and sell things like stocks and bonds. Investment banks, stockbrokers, and small investors buy long-term securities. Continue reading to become an expert in differences between money market and capital market and learn everything you can about it
Buyers and sellers trade short-term debt on money markets. Every kind of government and business, as well as every kind of bank and financial institution, can borrow or lend money overnight, often for up to a year.
Differences between Money Market and Capital Market
Those who trade on the money market are investors. It’s a good way to save money for later. Capital and money markets are in a state of balance. The economy needs both markets to work. The money market is a place where short-term financial instruments that are very liquid can be bought and sold.
Investing in the stock market for the long term. It buys and sells securities that have to do with the capital markets. In this article, we will discuss about differences between money market and capital market in brief with examples for your better understanding. To understand more clearly, keep reading about types of time value of money.
Returns
The cost of capital or the economic interest rate is equal to the yield on the money market. Most of the time, the only thing an investor gets back is interest. On the stock market, there seems to be no limit to how much money you can make. This could be because investors are willing to take risks over a long period of time.
Market Instruments
Both the money market and the capital market work on different time scales. At first, the money markets deal with short-term CDs, CP, and Treasuries. Most of the time, these kinds of relationships last for a year or less.
On the capital markets, people buy and sell stocks, bonds, and other long-term investments. The capital markets can help financial institutions meet their short-term and long-term capital needs.
Nature of Credit Instruments
On the capital market, there is a wider range of credit products than on the money market. Global financial markets need standardised credit instruments in order to do well. Diversification, which is a common thing to do, hurts investors.
Participants
Financial firms make up most of the money market. In addition, banks require short-term loans to ensure they have enough money to lend. Moreover, institutions like pension funds and mutual funds must always keep a certain amount of cash on hand, and investors who have requested to withdraw their funds must receive them back.
Furthermore, having money in circulation costs money, and a close second to this is investing in the money market. They can be used instead of cash because they are safe and easy to use. Everyone knows that when you take money out of a money market fund early, you don’t lose money.
Period of Maturity
Products that are traded on the money market usually have terms that range from one day to one year. It takes a long time to make money instruments.
Transaction Mode
Brokers sell most products on the money market over the counter. Most buying and selling on the stock market happens through exchanges. Traders act as middlemen between buyers and sellers.
Relation with Central Bank
The money market and the central bank are linked in some way. Through the money market, central banks can change the capital market.
Institutions
In the money market, central banks, commercial banks, acceptance houses, non-bank financial institutions, bill brokers, and others all play a part. On the other hand, in the capital market, institutions such as stock exchanges, commercial banks, insurance companies, mortgage banks, and building societies are included.
Funds
Money market funds can help financial institutions because they can give them working capital. So, most businesses only borrow a small part of the total value of their assets. The capital markets are where the company gets its money.
Liquidity
In money market assets, there is more liquidity. But despite what capital market market makers try to do, most money market items can be traded and make money. On the money market, investors like loans with shorter terms.
Purpose of Loan
Companies in the manufacturing sector often use the money market to obtain short-term loans. Industrialists get fixed capital from the capital market and use it to buy big things like buildings, cars, and machinery.
Basic Role
The money markets are responsible for making sure there is enough money to go around. Additionally, money flows through the financial markets and is invested in good projects with the hope that the results will be stable and long-lasting.
The capital market is where long-term loans and borrowing take place, while the money market is where short-term loans and borrowing take place (i.e., for more than one year).
Market Instruments
Money market products have longer terms than financial securities. CDs, CPs, BAs, and Repurchase Agreements have maturity dates that range from one day to a whole year. As a result, companies can use their liquidity component to meet their short-term capital needs.
The following are all types of money market securities: Treasury Bills, Commercial Papers, Certificates of Deposit, Repurchase Agreements, Banker’s Acceptance, and Call Money. Capital market instruments are things like bonds and stocks.
Stocks, bonds, and debentures take longer to turn into cash than cash does. Not only do they help meet long-term capital needs, but their prices also tend to change a lot.
Risk Element
One benefit of the fast trading of short-term assets on money markets is that it reduces financial risk. Money market instruments are a big help to businesses because they can handle market risk. You can protect yourself from risk by trading liquid assets.
Investing in the stock market for a long time is riskier. As a result, it is easier to move around in the economy and market. One big difference between the money market and the capital market is that the money market has a lower rate of return on investments. However, the rewards from the capital markets are higher if you have a longer time frame.
Safe Investment Option
The money market is a safe place to put your money for the short term. Because money market instruments are low risk, more and more people want to invest in them. Financial markets back projects that will be around for a long time. This makes these technologies even more dangerous.
The money market is not very dangerous. The stock market and other financial markets are becoming more unstable. The risk of an annual maturity is low, so it is safe. There are a lot of different kinds of risks in the capital markets.
Function
The main goal of money markets is to make it easy for the economy to get cash quickly. The capital market helps a country invest its money in ways that make it more productive.
Credit Instruments
On the money market, most credit instruments can be put into one of four main groups: call money, collateral loans, acceptances, and bills of exchange. On the other hand, on the capital market, people buy and sell things such as stocks, shares, debentures, bonds, and government securities.
Frequently Asked Questions
What is Capital Market?
Capital markets are financial exchanges where companies and governments can sell and buy securities that can be used to get long-term funding.
Difference Between Money Market and Capital Market?
The main difference between markets for spending money and markets for investing money is how mature they are. On the money market, you can buy and sell CDs, CPs, and Bas. On the capital markets, people buy and sell bonds, debentures, and shares.
What is the Money Market?
Money market instruments include the Banker’s Agreement, Commercial Paper, Certificates of Deposit, and Liquid Cash.
Conclusion
Both help the economy because they give businesses and industries the money they need in the short and long term. The desire to make money drives markets. Check out these differences between money market and capital market to broaden your horizons.