People often ask the question about the difference between the Money Market and Capital Market. To understand the difference between these two terms, we will first try to understand What is Money Market ? and What is Capital Market ?
Money Market:
The money market is a segment of the financial market that deals with short-term borrowing and lending of funds. This market provides an avenue for individuals, corporations, and governments to manage their short-term liquidity needs. The money market is highly liquid and consists of a variety of financial instruments with maturities of one year or less. The key players in the money market are commercial banks, central banks, corporations, and governments.
The primary objective of the money market is to provide short-term financing for borrowers and short-term investment opportunities for lenders. The money market is characterized by high liquidity, low credit risk, and low return. The instruments traded in the money market include Treasury bills, commercial papers, certificates of deposit, repurchase agreements, and short-term bonds.
Treasury bills (T-bills) are issued by the government to finance its short-term debt obligations. T-bills have a maturity period of 91 days, 182 days, or 364 days, and they are sold through auctions. Commercial papers are short-term unsecured promissory notes issued by corporations to finance their short-term funding needs. Certificates of deposit (CDs) are time deposits issued by banks and other financial institutions, and they have a fixed interest rate and maturity date. Repurchase agreements (repos) are short-term collateralized loans where the borrower agrees to repurchase the securities at a specified date and price. Short-term bonds are debt instruments with a maturity period of one year or less.
Capital Market:
The capital market is a segment of the financial market that deals with long-term borrowing and lending of funds. This market provides an avenue for corporations and governments to raise capital for long-term investments. The capital market is highly regulated and consists of a variety of financial instruments with maturities of more than one year. The key players in the capital market are corporations, governments, institutional investors, and individual investors.
The primary objective of the capital market is to provide long-term financing for borrowers and long-term investment opportunities for lenders. The capital market is characterized by low liquidity, high credit risk, and high return. The instruments traded in the capital market include stocks, bonds, and other long-term securities.
Stocks are equity securities that represent ownership in a corporation. When an individual buys a stock, they become a shareholder in the company and have the right to vote at shareholder meetings and receive dividends. Bonds are debt securities issued by corporations or governments to raise capital. Bonds have a fixed interest rate and maturity date, and they pay interest to bondholders. Other long-term securities include mortgage-backed securities, asset-backed securities, and mutual funds.
In summary, the money market deals with short-term borrowing and lending of funds, while the capital market deals with long-term borrowing and lending of funds. The money market is highly liquid and consists of low-risk, low-return financial instruments, while the capital market is less liquid and consists of high-risk, high-return financial instruments. The money market is used to manage short-term liquidity needs, while the capital market is used to raise capital for long-term investments.
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