What is the difference between money and capital markets?
Money markets are made up of short-term investments carrying less risk, whereas capital markets are more geared toward the longer term and offer greater potential gains and losses.
Differences between money markets and capital markets
Money markets are typically shorter-term and carry less risk but offer less potential reward. Capital markets are typically longer-term and offer greater risk but potential for greater rewards,” Milan explains.
Capital markets are markets in which money is lent for periods longer than a year, while money markets are markets in which money is lent for periods of less than a year.
Capital is a much broader term that includes all aspects of a business that can be used to generate revenue and income, i.e., the company's people, investments, patents, trademarks, and other resources. Money is what's used to complete the purchase or sale of assets that the company employs to increase its value.
Money market provides a platform for companies and governments to raise short-term funds to meet their operating expenses. On the other hand, capital market deals in long-term securities with maturities of more than one year, such as stocks and bonds.
Money market instruments include Bills of Exchange or Commercial Bills, Treasury Bills (T-Bills), Commercial Papers (CP), Certificate of Deposits (CD), Repurchase Agreements, Banker's Acceptance and Call & Notice Money. Capital market instruments include bonds and stocks.
The money market is defined as dealing in debt of less than one year. It is primarily used by governments and corporations to keep their cash flow steady, and for investors to make a modest profit. The capital market is dedicated to the sale and purchase of long-term debt and equity instruments.
| Parameters | Money Market | Capital Market |
|---|---|---|
| Market Type | Informal | Regulated/ formal |
| Purpose | For working capital requirements | To turn into a part of the asset base of the organisation |
| Categories | None | Primary and Secondary |
| Transaction Type | Over the counter | Exchange |
A 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.
While money itself may be construed as capital, capital is more often associated with cash that is being put to work for productive or investment purposes. In general, capital is a critical component of running a business from day to day and financing its future growth.
What is the meaning of capital markets?
Capital markets are financial markets that bring buyers and sellers together to trade stocks, bonds, currencies, and other financial assets. Capital markets include the stock market and the bond market. They help people with ideas become entrepreneurs and help small businesses grow into big companies.
In accounting terms, and according to current conventions in national accounting, money belongs to capital in the sense that the latter is defined as the total of everything making up an individual's wealth.
Definition: Money market basically refers to a section of the financial market where financial instruments with high liquidity and short-term maturities are traded.
Capital markets consist of money market, bond market, mortgage markets, stock market, spot or cash markets, derivatives markets, foreign exchange and interbank markets.
Money markets include markets for such instruments as bank accounts, including term certificates of deposit; interbank loans (loans between banks); money market mutual funds; commercial paper; Treasury bills; and securities lending and repurchase agreements (repos).
The money market deals in securities of short-term with a maximum tenure of one year. The capital market deals in securities of medium and long term. Some of the common instruments of money market are Call Money, Commercial Bills, T. Bills, Commercial Paper, Certificate of Deposits, etc.
Capital markets are a very important part of the financial industry. They bring together suppliers of capital and those who seek it for their own purposes. This may include governments that want to fund infrastructure projects, businesses that want to expand, and even individuals who want to buy a home.
- Stock exchanges – Purchase and sale of stocks of publicly traded companies.
- Bond markets – Companies and governments issue bonds to raise capital, and investors buy and trade these bonds.
- Commodity markets – Investors buy and sell raw materials such as gold, oil, and agricultural products.
Similarities between the money market and capital market are as follows: Both are important components of the international finance market. Both markets permit investors to purchase debt securities. Businesses and governments depend on both the markets for raising money for operations.
- Diversification.
- Dividend.
- Liquidity.
- Performance.
- Transparency.
- Growth/Capital appreciation.
- Access to more efficient, effective and better priced funding.
What are capital markets for dummies?
Capital markets are a way to bring together individuals or institutions with money (also known as capital) they wish to invest, and various entities that seek money to underwrite costs to meet specific purposes.
A capital market is a long-term market meaning the maturity period of the borrowed fund is more than a year, and the money market is a short-term market meaning the maturity period of the borrowed fund is less than a year.
'Call Money' is the borrowing or lending of funds for 1day. Where money is borrowed or lend for period between 2 days and 14 days it is known as 'Notice Money'. And 'Term Money' refers to borrowing/lending of funds for period exceeding 14 days.
Based on this definition, we can see that only two of the above markets are included in the capital market, that is Government Bond Market and the stock market. The other two, Call Money Market and Treasury Bill Market are part of the money market, as they deal with short-term financial instruments.
One of the main differences between the money market and the stock market is that most money market securities trade in very high denominations. Furthermore, the money market is a dealer market, which means that firms buy and sell securities in their own accounts, at their own risk.
