Difference Between Money Market and Capital Market

Difference between money market and capital market is noticeably clear when both financial platforms are compared. Although many still confused their functions and roles in the financial market, capital market and money market are simply distinguished based on those who apply for which one of them.

A money market is a part of financial market that issues short-term loan to its customers. It also features assets that deal with short-term borrowing, lending, buying and selling. On the other hand, a capital market is the other part of the financial market which gives room to long-term trading of debt and equity-backed securities.
What then is a financial market? A financial market is a market in which people trade financial securities and derivatives at low transaction costs. It includes an open space where financial securities and other financial products are sold, bought, borrowed, or lent for the purpose of profit. Some of the securities include stocks and bonds, raw materials and precious metals, which are known in the financial markets as commodities.

Difference Between Money Market and Capital Market.

Let us quickly check out the said difference between money market and capital market which until now may have been some big blackout:

1. Capital Market

Apart from the fact that it is a financial market in which long-term debt (over a year) or equity-backed securities are bought and sold, capital markets channel the wealth of savers to those who can put it to long-term productive use, such as companies or governments making long-term investments. This market is however protected by market regulators such as SEBI, BoE, and SEC. The major objective of these regulators is to ensure a safe business environment for its investors against shady and tawdry business practices.

It is also to be noted that transactions on capital markets are importantly managed by entities within the financial sector or the treasury departments of governments and corporations. There are two markets under the capital market. These are:

  • Primary Market

The primary market issues new stock or bond which are then sold to investors, often via a mechanism known as underwriting. The main entities seeking to raise long-term funds on the primary capital markets are governments (which may be municipal, local or national) and business enterprises (companies).

  • Secondary Market

Secondary market sells and buys existing securities among investors or traders. It is usually done on an exchange, over-the-counter, or elsewhere. The existence of secondary markets increases the willingness of investors in primary markets, as they know they are likely to be able to swiftly cash out their investments if the need arises.

2. Money Market

Money market is the part of the financial market for assets involved in short-term borrowing, lending, buying and selling with original maturities of one year or less. The money market unlike capital market is different in that while capital market operates on a long-term sales of securities, the money market operates on a short-term. Money market is traded over the counter and on a wholesale scale. It also makes use of a highly liquid, short-term assets.

The financial instruments supplied in money market is often called paper, while that of the capital market is called bonds and equity. In case you want to know the difference between money market and capital market, it cannot be argued that money market as well as capital market helps and assists big companies with financial needs. It is their term of agreement that differs.

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