Money Market vs Capital Market
Money and capital markets are two most easily confused concepts, as they are usually incorrectly identified to be the same thing. It is true that both money market and capital market play a vital role in the functioning of the global economy by providing access to financial markets to raise funds for various purposes. However, it is important to understand the differences between the two and the requirements that must be fulfilled, as well as the circumstances under which firms and individuals may borrow from either market. The following article will show a clear cut picture of how the two markets are different, and the instances under which obtaining finance from each will be appropriate.
The money market is a financial market that provides investors access to short term debt instruments, which include treasury bills, certificates of deposit, banker’s acceptances, commercial papers and repo agreements. These instruments are usually issued by financial institutions such as banks and investment companies, large corporations such as multinational firms as well as governments through the use of treasury securities. The financial instruments issued by such corporations possess a high rating with lower levels of risk and high liquidity. However, the lower risk of such securities means that the interest paid for holders of money market securities is lower.
Capital markets provide access to longer term finance through the use of debt capital and equity capital such as stocks, bonds, options and futures. Capital markets comprise of organized platforms for exchanges and over the counter markets, and the market is divided into two segments known as primary markets and secondary markets. The primary market is where securities are issued for the first time, and secondary market is where securities, which have been already issued, are traded among investors. The capital markets are under stringent regulations of the Securities and Exchange Commission, to ensure that securities traded are of good credit ratings so that no fraud may occur.
What is the difference between Money Market and Capital Market?
Money markets and capital markets are both essential for the global economy in terms of offering financing for firms and organisations to carry out operations and expand business activities. Both markets trade in large denominations of currency daily and both markets do not have physical presence; trade is carried out through cyber platforms with computerized systems. Money market is mainly accessible for large corporations and financial institutions, whereas, capital markets are accessible to small individual investors. The maturity period of a money market instrument is very short; up to less than one year, as opposed to the maturity period for capital market instruments, which are for more than one year up to about 20 to 30 years. The money market usually caters to the short term working capital needs of firms, and the long term financial needs and funds for expansion are usually obtained from capital markets.
In a Nutshell:
Money Market vs Capital Market
• Money markets and capital markets provide investors access to finance which are used for growth and further expansion, and both markets trade on computerized exchanges.
• The main difference between the two markets is the maturity periods of the securities traded in them. Money markets are for short term lending and borrowing, and capital markets are for longer periods.
• The forms of securities traded under both markets are different; in money markets, the instruments include treasury bills, certificates of deposit, banker’s acceptances, commercial papers and repo agreements. In capital markets, instruments include stocks and bonds.
• As an individual investor, the best place to invest your money would be in the capital markets, either the primary market or secondary market. In the perspective of a large financial institution or corporation looking for larger funding requirements, the money market would be ideal.