difference between money market and capital market

difference between money market and capital market

Difference Between Money Market and Capital Market

Posted on September 17, 2011 by admin

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.

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.

Difference Between | Descriptive Analysis and Comparisons

Key Difference: Money market is a component of financial market where short-term borrowing can be issued. This market includes assets that deal with short-term borrowing, lending, buying and selling. A capital market is a component of a financial market that allows long-term trading of debt and equity-backed securities. Long-term borrowing or lending is done by investors or corporations that have large amounts of wealth at their disposal.

When it comes to business, each business at a certain point has to borrow money in order to keep running business. There are multiple ways that a company can borrow money, including issuing bonds, shares or taking up a loan. There are two different components of the financial market; known as Money Market and Capital Market. These terms are more commonly come across in business and economics.

Money market is a component of financial market where short-term borrowing can be issued. This market includes assets that deal with short-term borrowing, lending, buying and selling. The short-term ensures that the borrowing and lending period has a lease of less than one year. The lease can also be as short as a one hour, depending on the borrower and the lender. According to The Global Money Markets, Trading is usually done over the counter using instruments such as Treasury bills, commercial paper, bankers' acceptances, deposits, certificates of deposit, bills of exchange, repurchase agreements, federal funds, and short-lived mortgage-, and asset-backed securities. The money market was created as some businesses has a surplus of cash, while the other businesses were looking for loans.

In the United States, all federal, state and local governments issue papers that are traded in form of money. These include municipal paper and Treasury bills. The main functions of Money market include: Transfer from parties with surplus funds to parties with a deficit, transfer of large sums of money, help to implement monetary policies, determine short-term interest rates and allow government to raise funds. The interest rates in a Money market are also high as the borrowing time is low. Trading in the money markets are usually done by banks or companies with high credit ratings.

A capital market is a component of a financial market that allows long-term trading of debt and equity-backed securities. Long-term borrowing or lending is done by investors or corporations that have large amounts of wealth at their disposal. The most popular capital market is the NYSE or the New York Stock Exchange. Huge financial regulators are responsible for overseeing the capital market to ensure that companies do not defraud their investors. Trading can be done by a number of credit instruments such as stocks, shares, equity, debentured, bonds, and securities. Much of the trading is actually done online using a computer. There is no actual cash involved in trading.

Investments made in a capital market usually last longer than a year and can even last up to 25-30 years. Some investments may depend on the life of the company, with the investment ending if the company shuts down. A benefit of this investment is that if need arises, the investor can swiftly cash their investment. Capital market can be divided into two divisions: stock markets and bond markets. In stock markets investors acquire the ownership of the company they are investing in, while in bond markets investors are considered as creditors. Investment done in capital markets are usually for acquiring physical capital goods that would help increase its income. However, generating an income may take anywhere from a couple of months to many years or could even fall through.

Difference between Money Market and Capital Market

Money markets are used for a short-term basis, typically for possessions up to one year. Conversely, capital markets are used for long-term assets, which are any advantage with maturity superior to one year. Capital markets contain the impartiality (stock) market and liability (bond) market. Financial market can whichever be a Money Market where extremely liquid financial tools are operated or a Capital Market wherever buying and selling in securities are done to increase long-term assets for the entity. These two terms are very intricate to understand and that is why people use them interchangeably. So come on, let’s first comprehend the meaning and alteration between Money Market and Capital Market.

A muddled arena of banks, financial institutions, bill brokers, money dealers, etc. were the trading on short term monetary tools is being determined is known as Money Market. These markets are also identified by the name wholesale market. Crafter Credit, Saleable Paper, Certificate of Deposit, Capital bills are some examples of the short-term obligation instruments. They are highly gooey (cash equivalents) in nature and that is why their renovation period is limited to one year. They provide a low return on investment, but they are fairly safe interchange instruments. Money Market is a haphazard market and so the trading is done off the exchange, i.e. Over. The Counter (OTC) between two revelries by using email, phones, fax, online, etc. It plays a significant part in the passage of short-term funds in the economy. It helps the traders to fulfill their working capital requirement. As cash turned into aware, the currency market turned into a segment of the budgetary markets for resources required in fleeting obtaining, borrowing, purchasing and offering with unique developments of one year or less. Exchanging currency markets is done over the counter and is wholesale. There are a few currency market instruments, including treasury charges, the business paper, financiers’ acknowledgments, stores, testaments of store, bills of trade, repurchase assertions, government supports, and fleeting home loan , and resource sponsored securities. The instruments bear contrasting developments, coinage, credit dangers, and structure and along these lines might be utilized to appropriate introduction. The currency market comprises of budgetary organizations and merchants in cash or credit who wish to either obtain or loan. Members get and loan for brief periods, regularly up to thirteen months. Currency market exchanges fleeting monetary instruments ordinarily called “paper”. This appears differently in relation to the capital business sector for more term subsidizing, which is supplied by bonds and value. The center of the currency market comprises of interbank loaning—banks getting and loaning to each other utilizing business paper, repurchase assertions and comparative instruments. These instruments are regularly benchmarked to (i.e., valued by reference to) the London Interbank Offered Rate (LIBOR) for the proper term and money. Account organizations commonly support themselves by issuing a lot of benefit sponsored business paper (ABCP), which is secured by the vow of qualified resources into an ABCP course. The case of qualified resources incorporates vehicle advances, Visa receivables, private/business contract advances, contract upheld securities and comparable money related resources. Some expensive enterprises with solid FICO assessments, for example, General Electric, issue business paper all alone credit. Other substantial enterprises organize banks to issue business paper for their sake. Created currency markets help the business banks to end up independent. In the circumstance of crisis, when the business banks have a lack of assets, they require not approach the national bank and get at a higher loan cost. They can meet their prerequisites by reviewing their old short-run advances from the currency market.

A type of monetary market where the government or company refugees is being created and trafficked for the determination of floating long-term finance to meet the capital obligation known as Capital Market. The securities which are traded encompasses stocks, bonds, euro issues, etc. whose maturity period is not limited up to one year or sometimes the sanctuaries are unalterable (no maturity). The market plays a radical role in the process of circulating the capital in the economy between the contractors of money and the users. The Capital Market works under the complete and comprehensive supervision of the Refuges and Exchange Board to defend the interest of the investors. The Capital Market contains both dealer market and auction market. It is approximately divided into two main categories.

  • Primary Market: A market where fresh securities are obtainable to the public for contribution is given this name.
  • Secondary Market: A market where already issued sanctuaries were trafficked amongst depositors is known as Secondary Market.

Present day capital markets are perpetually facilitated on PC-based electronic exchanging frameworks; most can be gotten to just by the elements that are present inside the budgetary segment or the treasury branches of governments and organizations, however, some can be gotten to straightforwardly by the public. There are numerous a huge number of such frameworks, most serving just little parts of the general capital markets. Elements facilitating the frameworks incorporate stock trades, speculation banks, and government offices. Physically the frameworks are facilitated everywhere throughout the world, however, they have a tendency to be gathered in money related focuses like London, New York, and Hong Kong.

Difference Between Money Market and Capital Market

In order to understand what the differences between things are you first need to understand what each of the items is. In this case before you can understand the difference between money market and capital market you are going to need to understand what money market is and what capital markets is. Once you understand the two items are it will be easier to see what the difference or differences are between the two markets.

Basically the money market is the global financial market for short-term borrowing and lending and provides short term liquid funding for the global financial system. The average amount of time that companies borrow money in a money market is about thirteen months or lower. Some of the more common types of things used in the money market are certificates of deposits, bankers’ acceptance, repurchase agreements and commercial paper to name a few. Basically what the money market consists of is banks that borrow and lend to each other, but other types of finance companies are involved in the money market. What usually happens is the finance companies fund themselves by issuing large amounts of asset backed commercial paper that is secured by the promise of eligible assets into an asset backed commercial paper conduit. Your most common examples of these are auto loans, mortgage loans, and credit card receivables.

Basically the capital market is a type of financial market, it includes the stocks and bonds market as well. But in general the capital market is the market for securities where either companies or the government can raise long term funds. One way that the companies or the government raise these long term funds is through issuing bonds, which is where a person buys the bond for a set price and allows the government or company to borrow their money for a certain time period but they are promised a higher return for allowing them to borrow the money, the higher return is paid through interest that accrues on the money that the government or company borrows. Another way that the companies or government can raise money in the capital market is through the stock market, most of the time you don’t see the government as a part of the stock market, but it can actually happen so we need to include them. But how the stock market works is that the companies decide to sell shares of their stock, which is basically ownership in the company, to ordinary people and other companies, as a way to raise money. The people who buy the stock are usually given dividends each year, if the company has agreed to pay out dividends, so that is another possible return on their investment.The capital market actually consists of two markets. The first market is the primary market and it is where new issues are distributed to investors, and the secondary market where existing securities are traded. Both of these markets are regulated so that fraud does not occur and in India the Securities and Exchange Board of India (SEBI) is in charge of regulating the capital market.

Difference Between Money Market and Capital Market

Basically the difference between the money market and capital market is that money markets are more of a short term borrowing or lending market where banks borrow and lend between each other, as well as finance companies and everything that is borrowed is usually paid back within thirteen months. Whereas capital markets are for long term investments, companies are selling stocks and bonds in order to borrow money from their investors to improve their company or to purchase assets. Another difference between the two markets is what is being used to do the borrowing or lending. In the money markets the most common things used are commercial paper and certificates of deposits, whereas with the capital markets the most common thing used is stocks and bonds. Money market is distinguished from capital market on the basis of the maturity period, credit instruments and the institutions:

Difference Between Money Market and Capital Market

The financial market is a marketplace where investors deal in financial instruments. It provides a vehicle for allocation of savings to investment. It can be grouped as money market and capital market. Both the markets are very important in the financial sector. In the money market, extremely liquid financial instruments are traded, i.e. monetary instruments of short-term nature are dealt. On the contrary, the capital market is for long term securities. It is a market for those securities which have direct or indirect claims to capital.

Capital Market plays a crucial role in the development of the economy because it provides channels for mobilization of funds. On the other hand, money market possesses a range of operational features. The article presented to you explains the difference between money market and capital market in tabular form.

Content: Money Market Vs Capital Market

An unorganised arena of banks, financial institutions, bill brokers, money dealers, etc. wherein trading on short-term financial instruments is being concluded is known as Money Market. These markets are also known by the name wholesale market.

Trade Credit, Commercial Paper, Certificate of Deposit, Treasury Bills are some examples of the short-term debt instruments. They are highly liquid (cash equivalents) in nature, and that is why their redemption period is limited to one year. They provide a low return on investment, but they are quite safe trading instruments.

Money Market is a unsystematic market, and so the trading is done off the exchange, i.e. Over The Counter (OTC) between two parties by using phones, email, fax, online, etc. It plays a major role in the circulation of short-term funds in the economy. It helps the industries to fulfil their working capital requirement.

A type of financial market where the government or company securities are created and traded for the purpose of raising long-term finance to meet the capital requirement is known as Capital Market.

The securities which are traded includes stocks, bonds, debentures, euro issues, etc. whose maturity period is not limited up to one year or sometimes the securities are irredeemable (no maturity). The market plays a revolutionary role in circulating the capital in the economy between the suppliers of money and the users. The Capital Market works under full control of Securities and Exchange Board to protect the interest of the investors.

The Capital Market includes both dealer market and auction market. It is broadly divided into two major categories: Primary Market and Secondary Market.

  • Primary Market: A market where fresh securities are offered to the public for subscription is known as Primary Market.
  • Secondary Market: A market where already issued securities are traded among investors is known as Secondary Market.

Key Differences Between Money Market and Capital Market

The following points are substantial, as far as the difference between money market and capital market is concerned:

  1. The place where short-term marketable securities are traded is known as Money Market. Unlike Capital Market, where long-term securities are created and traded is known as Capital Market.
  2. Capital Market is well organised which Money Market lacks.
  3. The instruments traded in money market carry low risk, hence, they are safer investments, but capital market instruments carry high risk.
  4. The liquidity is high in the money market, but in the case of the capital market, liquidity is comparatively less.
  5. The major institutions that work in money market are the central bank, commercial bank, non-financial institutions and acceptance houses. On the contrary, the major institutions which operate in the capital market are stock exchange, commercial bank, non-banking institutions etc.
  6. Money market fulfills short term credit requirements of the companies such as providing working capital to them. As against this, the capital market tends to fulfill long term credit requirements of the companies, like providing fixed capital to purchase land, building or machinery.
  7. Capital Market Instruments give higher returns as compared to money market instruments.
  8. Redemption of Money Market instruments is done within a year, but Capital Market instruments have a life of more than a year as well as some of them are perpetual in nature.

The main aim of the financial market is to channelize the money between parties in which Money Market and Capital Market helps by taking surplus money from the lenders and giving them to the borrower who needs it. Millions of transactions take place around the world on a daily basis.

Both of them work for the betterment of the global economy. They fulfil the long term and short term capital requirements of the individual, firms, corporate and government. They provide good returns which encourage investments.

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