The money market and the capital market are two significant elements of the global financial system, not one single institution.
- Short-term debt is traded on the money market. Governments, businesses, banks, and other financial institutions constantly borrow money and lend money for terms as short as overnight and as long as a year.
- The trading of both stocks and bonds is included in the capital market. Financial institutions, licensed brokers, and individual investors purchase these long-term assets.
The financial market, also referred to as the money market, is largely made up of the capital market and money market combined.
The Money Market
For a brief period of time, typically one year or less, the money market is a good place for individuals, banks, other businesses, and governments to park cash. It exists so that organizations and governments that require money to function can do so quickly and affordably, and so that organizations with extra cash can use it.
The risks are low, but the returns are modest. Deposits, collateral loans, acceptances, and bills of exchange are some of the instruments used in the money markets. The Federal Reserve, commercial banks, and acceptance houses are some of the organizations that participate in the money markets.
Short-term debt is typically issued by businesses or governments to finance ongoing operations or provide working capital rather than for capital expenditures or significant projects.
About Liquidity
The money market is crucial in ensuring that banks, other businesses, and governments consistently maintain the right level of liquidity, without running out of money and needing to take out more expensive loans, and without hoarding extra money that isn’t earning interest.
Individual investors can invest their savings in a secure and convenient location by using the money markets. There are numerous options, including mutual funds that concentrate on municipal, U.S. Treasury, and state money market funds. Many government funds are exempt from taxes. Most banks also allow you to open a money-market fund.
The Capital Market
Securities such as bonds and stocks are traded on the capital market. Its hourly fluctuations are continuously tracked and evaluated for hints about the state of the economy as a whole, the state of each industry within it, and the general outlook for the near future.
The primary objective of enterprises and institutions that participate in the capital markets is to raise money for their long-term goals, which are often corporate expansion and revenue growth. They accomplish this by selling company bonds and stock shares.
Primary and Secondary
A primary market and a secondary market are the basic divisions of the capital market. When a corporation issues a new bond or round of stock, it places it on the primary market for direct sale to individuals or institutions. These buyers sell their shares or bonds on the secondary market if and when they decide to do so. Although firms have a vested interest in seeing the price of their stock shares increase over time, the original issuer of such stocks or bonds does not instantly benefit from their resale.
The capital market has a higher potential for gains and losses than the money market and is inherently riskier.
