The money market and the capital market are both parts of the financial in its broad sense. A lot of people, especially beginners do confuse both markets. It is best to explain both concepts. In order to understand both markets, it is best to understand the similarities and differences between both markets. This post explains in details both markets and helps you understand the similarities and difference between both markets.
What is a Money Market
The money market is a financial market for short-term borrowing from financial institutions. Corporations and sometimes the government access the money market to borrow from financial institutions. The money market is usually for short-term. The major institutions that are players in the money markets are the Central banks and various commercials on one part, then corporations and sometimes the government on the other part. Corporations usually use the money market to raise capital for the short-term running of the business.
What is Capital Market
The capital market is a platform in the financial market where companies sell their equities and bonds. The capital market is made up of the stock market which includes companies equities and bond market which are government Is used bonds. Companies make use of the capital market to raise money for longterm projects. The major players in the capital market are insurance companies, stock exchanges, corporations, and banks.
Similarities Between The Money Market and The Capital Market
The one thing that both the money market and the capital market have in common is that both markets are part of the bigger financial market.
Money Market Vs Capital Market
Difference Between the Money Market and The Capital Market
a. Money Market: The money market instruments are loans backed with collateral, bills of exchange, promissory notes and deposits.
b. Capital Market: The capital market instruments are bonds, shares, and debentures
2. Time Frame:
a. Money Market: Money market instruments are usually short term. Companies use the market to access loans for the short-term running of the business. Thus, the maturity period of money market funds is usually short term. The timeframe is usually overnight to less than a year.
b. Capital Market: The capital market instruments are longterm in nature. There is no specified maturity period for the capital market instruments. The maturity period for some capital market instruments can be up to up to 10 years or more. In other words, capital market investments are usually long-term investments.
a. Money Market: For the purpose of clarity, liquidity is the ability to convert an investment into cash. An instrument is said to be liquid if it can be easily converted to cash when needed. So, money market investments are liquid in nature. Which means that you can easily convert them to cash when needed.
b. Capital Market: The capital market, on the other hand, is not liquid. It is a little bit difficult to convert your equities to a company to cash.
4. The purpose for Issue
a. Money Market: Corporations generally access the money market to loans for the short-term running of the companies.
b. Capital Market: Companies on the other hand access the capital market to raise runs for expansion of business, or to carry out long-term capital intensive projects. The government also issue bonds in the capital market to handle bigger projects. Remember that the government doesn’t issue equities.
a. Money Market: The players in the money market are central banks, commercial banks, and corporations.
b. Capital Market: Players in the capital markets are insurance companies, underwriters, corporations, government, stock exchanges.
a. Money Market: The money market instruments are generally low-risk investments. The instruments are less volatile
b. capital Market: The capital market instruments are high-risk investments. They are generally volatile in nature.
7. Return of Investment
a. Money Market: The returns on investment on a money market investment is low. It is natural for the ROI to be low since the investment has very low risk.
b. Capital Market: The returns on investment on a capital market instrument is high. High-risk investments usually come with higher returns.
The similarity and differences between money market and the capital market have been explained in details. One other thing is that these markets are usually for the big players.