This article will explain How Money Market is Different from Capital Market
Money market is a place where investors can buy and sell securities, while capital markets are places where businesses raise capital through issuing stocks and bonds.
Another difference that separates the both is the money market is the term used for investment funds that are relatively short-term in nature (usually 3 months or less), the capital market is the market that includes the stock exchange and other markets where longer-term investments are made.
If you’re trying to raise money for your new business, you’ll need to decide between raising money in the money market or in the capital market.
Let’s dive into the details to know about the difference between the money market and capital market.
Money market
When people talk about the money market, they usually refer to the money that banks and other financial institutions lend to other companies and individuals. Money markets enable the the companies and governments to meet their short-term borrowing needs.
The maturities of money market instruments are short-term. Generally, the maturity periods of money market instruments are under 3 months or less. in any case, it doesn’t go beyond the year.
Instruments of money market
there are certain instruments that can be traded in the money market.
Treasury bills
Governments issue treasury bills to raise money. These bills are issued on discounted value, and settles at the par value. Therefore, no interest is paid to the investor of the treasury bills.
Example: Government issues treasury bill of USD 1,000 at discounted value of USD 950. The maturity period of three months. The investor will pay USD 950 for this bill. After three months (at maturity of the treasury bill), the Government will pay USD 1,000 to the investor. In this way, the total return of investment is USD 50.
Certificate of deposit (CD)
Certificate of deposit is issued by the bank and could be bought and sold similar to the shares.
Example:
ABC Bank issues a CD of USD 500,000 to its customer for the period of five months. After five months the customer will get its money back to a certain agreed interest amount in addition to the principal investment of USD 500,000. In case, the customer needs its money before the maturity period, the CD can be sold in the money market.
Commercial paper
Commercial paper is issued by the large companies and doesnt pay interest in a similar way to treasury bills. However, the investor buys the commercial paper at the discounted price and later on receives the full value at the maturity.
Capital market
The term capital market is used when people talk about the shares that companies and individuals offer to the public. the capital markets where the long term capital is raised by the companies and governments in the form of shares. The companies can raise money by issuing equity in the form of shares, also known as Equity Capital Market (ECM). In a similar way, the companies can raise money by issuing debt in the form of bonds, also known as Debt Capital Market (DCM).
In a stock market, investors trade shares of ownership in a company in exchange for the right to receive cash dividends and, in some cases, a share of future profits. In a bond market, lenders trade ownership of debt instruments in exchange for interest payments.
We can classify the capital market in two major types.
Primary capital market
When the company decides to go public, it starts its journey from the primary capital market. Primary capital market is a place where the stocks and bonds are first made available to general public. All initial public offerings (IPO) of the companies are done in primary capital market. Investment banks provide the primary capital market services to the capital seekers for underwriting, pricing and listing of securities.
Generally, investment banks, insurance companies, pension funds are the main players in the capital markets. General public usually don’t get to participate in the primary capital market.
Secondary capital market
The already issued securities are traded in secondary capital market. The secondary market is also known as stock market. Dealers and brokers facilitate the trading in the secondary capital market. Since the already issued shares and bonds are traded in the secondary market, therefore, the original issuer of these securities doesn’t get any further money. all these securities are being traded between investors.
Money Market Vs. Capital Market: An Overview
The money market and the capital market are two broad components of the global financial system. The money market is the trade in short-term debt. It’s 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 includes the trading of stocks, bonds, and other instruments that have time horizons of more than a year. This makes these investments good long-term investments.
How Money Market is Different from Capital Market
Duration of maturity
The maturity period of investments in money market is short-term (doesn’t go beyond one year). However, in capital market it takes more than a year to realize the investments.
Risk level
Money market is relatively less risky as compared to the capital market. The investor gets its money back in short period, therefore, macro economic factors don’t really influence the money market. Risk averse investors prefer money market instead of capital market.
Objective
Money market is primarily preferred to maintain wealth. whereas capital market is ideal to generate wealth due to high return on investment.
Liquidity
Since the maturity period of the investment is short term, therefore, the money market investments can be flipped easily. Investors in capital market need to wait for the right time to trade their holdings. That’s why the capital market is considered to be less liquid.
Money market Vs. Capital market – where to invest
If you want to park your cash for short term then obviously money market suits you. For long term holdings, capital market is better.
Investors have higher returns in the capital market than in the money market. In the capital market, the interest rates are usually higher, so the returns on investment are also higher.
If you want to make a quick profit from investments, then you should choose the money market. On the contrary, if you want to create wealth for the times coming ahead, then capital market is suggested.
What is a Money Market Fund?
A money market fund is a type of investment that invests in a portfolio of cash and short-term investments, like Treasury bills and commercial paper.
When you invest in a money market fund, you’re usually looking for a return of about one percent per year. That’s lower than you can get from stocks or bonds, but the returns are steady.
Why People Invest In Money Market Funds
When you invest in a money market fund, you’re not looking to make a lot of money. You just want to make sure that your money is safe.
This is why most people invest in money market funds, instead of other types of investments, like stocks and bonds.
If you have cash that you don’t want to keep in a savings account, a money market fund is a good option. And if you want to be able to access your money easily, you can also use a money market fund to buy or sell stocks and bonds.
Why a Money Market Fund Is a Good Place to Put Your Money
A money market fund is an attractive place to put your money because it’s so stable. It’s a type of investment that you can count on to keep your money safe, and to provide you with a steady return.
A lot of people think that a stock market is the same as a money market. However, these are two very different things.
A stock market is where you can buy shares of companies. And it’s an open market where anyone can sell shares to anyone else.
A money market is a place where you can borrow or lend money. And it’s considered a closed market.