Are you ready to be that perfect investor, Who makes a profit from every investment? So, all you need is to do is follow some simple steps, and you can achieve it all. Today, we all have a platform to invest where you get to trade and invest with your assets. What is it then? It is a financial market, a place where you trade and where every other market comes in. So, the money market and capital market are also a part of the financial market.
The money market and capital market are not single institutions but two broad components of the global financial system.
So, let’s dive into our guide and help you understand every bit about the Market and make you an expert.
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What is the financial market?
So, before you move ahead and understand the money market and capital market, let us first comprehend what is a financial market? So, a financial market is a marketplace where investors trade in financial instruments.
All you do is invest and make those right choices and earn money. However, it is not as easy as you think. With experience you learn and create a better space in the financial market.
In the global finance market today, you have to be through with every aspect of it. So, the financial market plays a vital role in the smooth operations of capitalist economies by allocating resources and creating liquidity for businesses and entrepreneurs like you and me. The financial market makes it easy for buyers and sellers like us to share their holdings.
So, It creates security products that help Investors/lenders who have excess money to get something in return. And also make these funds available for those who need additional money ( borrowers). You can be lender or a borrower, its depends on your requirements.
So, a financial market includes any place where trading of security occurs. It also involves the stock market, bond market, forex market, and derivatives market. But, Technically a financial market in simple terms is a place where you trade your financial assets.
Now that you know what the financial market is. Let us look at the money market and capital market differentiation.
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Now, that you know what Financial market is let us look at what Money market it. Well, both money and capital market are a part of financial market.
What is the money market?
The money market is a financial market that provides investors with short-term debt instruments. So, if you are looking for some short-term investing, it is a perfect match for you.
It includes treasury bills, certificates of deposit, Commercial Paper, Certificate of Depositbanker’s acceptances, commercial papers, and repo agreements.
The money market is a suitable place for individuals, banks, other companies, and governments to store cash for a short period, usually one year or less. Money Market highly is liquid ( equal to cash) in nature, and that is why the redemption is confined to one year. So, this looks like a short time where you can trade and make a profit.
It also ensures banks, other companies, and the government maintain a suitable level of liquidity daily. So, without falling short of cash and taking a more expensive loan and without hoarding excess cash that is not earning interest.
You know it is easy for businesses and governments that need cash to operate and get one at a reasonable price. And also beneficial for those businesses that have more money to put in use. So, multiple choices are available for you, including mutual funds which concentrate on state money market funds, municipal funds, and U.S. Treasury funds.
Though you may get a low return on your investment, it is the most secure trading instrument. But, you must know money market is also an unsystematic form of market, so the trading is done on the exchange between two parties by using phones, email, fax, online, etc.
But, there is no denying the money market plays an essential role in the circulation of the short-term fund in the economy. The money market also makes it possible for the industries to fulfill their working capital requirements.
The Money Market is directly and closely linked with the central bank of the country. Allows you to participate in the money market overnight and make investments that would serve only a few hours at most. Generally, a highly secured investment that offers safety to temporary investments.
So, the business that trades assets to the money market prefers it to secure short- term liquidity. It is not for those parties looking for fund capital or long-term expenses. Preferably, for someone who needs liquidity that will pay them back within a year.
However, retail investors hardly access the money market directly, although individuals can participate in the money market funds. There are many tax-free government funds available too. The money-market fund also can be opened at most banks.
So, if you are looking for some short-term investment opportunities, the money market will help you with it.
What is Capital Market?
The Capital Market is where stocks, debentures, and bonds are traded, geared for long-term investing, and the investors share the growth of the company. Every moment gets monitored from hour to hour and analyzed for clues for the health of the economy at large, the status of every industry in it, and the consensus for the short-term future. So, the capital market not only serves long-term investing but long-term capital investment too.
The main goal of the company’s institution that accesses the capital markets is also to raise money for their long-term purposes. Which usually comes down to growing their businesses and growing their revenues.
The assets traded in the capital market vary in liquidity. Some may be highly liquid, like stocks that you can easily convert into cash. And something like a mutual fund will have less liquidity.
For investors, the capital market becomes a way to develop value with their money over time. So, if you are a trader is trading in the capital market, you will look for long-term holdings that will accrue the value of the holdings over the years.
Some traders who sell the assets rapidly tend to reinvest in other assets, instead of taking all the money together. It is completely opposed to a money market account, in which investors have short-term trading beyond the investment opportunities.
For the companies selling assets, the capital market constitutes a path to raise long-term financing for capital expenses. Some examples of this include companies and governments selling bonds.
Through which they fund their operations by selling long-term structured debt. Additionally, the company sells share equity in the form of stocks – To raise capital for operation, expansion, or startup costs.
Both individuals and institutions alike trade in the capital market. However, this is a more risky market than the money market both in the potential of profit and loss.
So, you are willing to make those long-term investments, the capital market is the right place for you.
Two types of Capital Market
The Primary Market – The Primary market is where debt-based, equity-based, or any additional asset-backed securities are built, written, and sold off to investors. Here the purchasers get the financial assets straight from the issuer, and the purchase price goes to the capital funds that the issuer is working to establish.
The Secondary Market- The Secondary Market is when the security is offered to the general public after being offered in the primary market. You will find such securities listed on the stock exchange. The major trading in the secondary market is divided into two parts, equities, and debt market. Traders usually swap existing securities among themselves.
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Money Market and Capital Market
|Money Market||Capital Market|
|The money market is a financial market that provides investors with short-term debt instruments||The Capital Market is where stocks, debentures, and bonds are traded for the long term.|
|Short term securities are traded in the Money market||Long-term securities are created and traded in Capital Market|
|Money Markets are Informal||Capital Market is formal|
|Money markets have low returns||Capital markets can have considerably higher returns.|
|Money markets are considered low risk.||Capital markets are potentially high risk depending on the asset.|
|Time horizon is within a year in Money Market||Time horizon is more than a year in Capital Market|
|Money Market is highly Liquid||Capital Market is comparatively less liquid|
|Increases liquidity of funds in the economy||Mobilization of Savings in the economy.|
Both the Money market and the capital market are part of the financial market and equally essential components. You choose according to your requirements and the money you have.
Every investor must study the pros and cons of the market before they choose one. Each Market benefits the economy in its unique way. So, you should figure out what market best suits for you to invest in.
You should know money and capital market – required for the progress of the economy. They also fulfill the long-term and short-term capital needs of the business and industry. The markets encourage individuals like you and me to invest money to gain good returns.
Each market fulfills the long term and short term requirements of the company and the individual. However, it has its losses and gains. The main aim of the financial market is to channelize the money between parties in which Money Market and Capital Market. By taking surplus money from the lenders and giving them to the borrower who requires it.
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