Difference between Money and Capital markets

The financial market comprises many parts, but the two most important ones are the money market and the capital market. But there are significant differences between them. Only short-term liquid financial items are traded on the money market. In contrast, the capital market deals only with long-term securities. In this article, we will discuss what exactly the difference between money and capital markets is.

The Money market vs. the Capital market

The two different kinds of financial markets are the money market and the capital market, with the money market being used for short-term borrowing and lending. In contrast, long-term assets, or those with a maturity of more than a year, are employed in the capital market.

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The Money market

The money market refers to an unorganized setting where trading on short-term financial instruments takes place and includes banks, financial institutions, bill brokers, money dealers, etc. The term “wholesale market” is another moniker for these marketplaces.

Some short-term debt instruments include Trade Credit, Commercial Paper, Certificates of Deposit, and Treasury Bills. Because of their very liquid nature, their redemption term is only one year. Although they have a poor rate of return on investment, they are very secure trading tools.

The importance of diversification

Trading takes place outside of the exchange since the money market is unsystematic. It has a significant impact on how quickly money moves across the economy. It aids in meeting the needs of the industry for working capital.

About Liquidity

You are not required to invest money in the money market for specified periods. You can access your funds anytime you need without incurring any fees. Other stable, short-term investments are less liquid. These exchanges are referred to as “money markets” because the assets bought and sold have short maturities, ranging from a day to a year, and are often easily convertible into cash. Money markets include bank accounts, interbank loans, money market mutual funds, commercial paper, Treasury bills, securities lending, repurchase agreements, and other financial products.

Bank deposits are the most well-known money market vehicles, although, despite certificates of deposit occasionally being traded like securities, they are not considered securities. Instead, depositors consider the institution’s trustworthiness and any government programs that insure bank deposits when lending money to the bank.

Note! The money market vs. the capital market is less risky, while the last one is potentially more rewarding.

The Capital market

The capital market is a specific type of financial market where corporate or government securities are created and traded to provide long-term financing to match the required capital. As a rule, it is not used for investing short-term capital. Instead, most investors use the capital market to save money for retirement or education.

To protect the interests of investors, financial regulators like the Securities and Exchange Board of India (SEBI), Bank of England (BoE), and the U.S. Securities and Exchange Commission (SEC) monitor capital markets. Although most capital market transactions are supervised by bodies inside the finance or treasury divisions of governments and corporations, some may be made readily available to the public.

Note! The most common capital markets are the stock market and the bond market.

The Primary market

Listed securities are initially made accessible to institutional and individual investors on the primary market. Securities are issued through either the Further Public Offer (FPO) or Initial Public Offer (IPO) channels on the primary market. An organization can initially publicly solicit investment from investors through the IPO procedure.

The Secondary market

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Previously issued or current shares are dealt with in the secondary market. Every security has a single central market sale limit, but secondary market resales are permitted. However, secondary market transactions do not explicitly support finance. Instead, they make it simpler for businesses and governments to withdraw cash from the primary market because investors know that they can sell their assets at a profit if they need their money back quickly. 

You may sell securities in the secondary market an unlimited number of times. Additionally, the secondary market categorizes securities according to their characteristics, such as whether they belong to stock or bond markets.

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What distinguishes between the money market and the capital market?

If we compare the money market and the capital market, the main differences lie in the following:

• Short-term securities are traded on the money market vs. the capital market, where long-term securities (stocks and bonds) are traded.
• In contrast to the capital market, where liquidity is relatively low, the money market has significant liquidity.
• Money market instruments have a low risk because of solid liquidity and a short maturity period, whereas capital market products have a higher risk.
• While capital markets sustain the economy through long-term financing and savings mobilization, money markets provide the economy with liquidity.
• The capital market often offers better investment returns than the money market.

More details about the differences between money and capital markets, along with charts and statistical sheets, can be found in the PDF file.

The bottom line

Money distribution and return generation are the two main objectives of the financial markets. Despite being considered secure, money markets may provide a loss. Investors should therefore consider the benefits and drawbacks of each financial instrument and the situation of the financial need before making a short-term or long-term investment.