What Are the Similarities Between the Money Market and the Capital Market? (2024)

FAQs

What Are the Similarities Between the Money Market and the Capital Market? ›

Similarities between the money market and capital market are as follows: Both are important components of the international finance market. Both markets permit investors to purchase debt securities. Businesses and governments depend on both the markets for raising money for operations.

As the money market greases the wheels of the companies with working capital, it meets the short-term credit needs of business. In case of the capital market, the long-term credit needs are met. Also fixed capital is provided to buy assets.

Capital markets are markets in which money is lent for periods longer than a year, while money markets are markets in which money is lent for periods of less than a year.

Capital markets are used to sell different financial instruments, including equities and debt securities. These markets are divided into two categories: primary and secondary markets. The best-known capital markets include the stock market and the bond markets.

The financial market is where all trades involving financial assets happen. The capital market is where companies and governments go to raise long-term capital. The stock market is where people buy and sell equity in listed corporations. The bond market is where people buy and sell bonds.

A well-functioning money market supports the bond market by increasing the liquidity of bonds. It makes it easy for financial institutions to cover short-term liquidity needs, and makes it less risky and cheaper to warehouse bonds for on-sale to investors and to fund trading portfolios of bonds.

Some examples of capital markets are NASDAQ, BSE, New York Stock Exchange, London Stock Exchange.

Money markets include markets for such instruments as bank accounts, including term certificates of deposit; interbank loans (loans between banks); money market mutual funds; commercial paper; Treasury bills; and securities lending and repurchase agreements (repos).

Which is safer money market or capital market? ›

The Money Market is less risky, as the instruments have a low default risk and a low interest rate risk, while the Capital Market is riskier, as the instruments have a high default risk and a high interest rate risk.

Have you heard of money market funds and wondered what exactly this type of investment is? Money market funds invest in short-term debt securities. As a result, money market funds can be a good option for investors looking for a low-risk investment that offers relatively easy access to their money.

While the money market and the capital market are both aspects of the larger global financial system, they serve different goals for investors. In a nutshell, the money market is where short-term debt and lending takes place; the capital market is designed for long-term assets, such as stocks and bonds.

Money market accounts are a type of savings account. They pay interest, but some issuers offer account holders limited rights to occasionally withdraw money or write checks against the account. (Withdrawals are limited by federal regulations. If they are exceeded, the bank promptly converts it to a checking account.)

Capital market is a place where buyers and sellers indulge in trade (buying/selling) of financial securities like bonds, stocks, etc. The trading is undertaken by participants such as individuals and institutions.

Based on this definition, we can see that only two of the above markets are included in the capital market, that is Government Bond Market and the stock market. The other two, Call Money Market and Treasury Bill Market are part of the money market, as they deal with short-term financial instruments.

The money market provides funds for investment into the goods and services market, and the savings on goods and services form as the source of funds in the money market. Both are connected at an equilibrium rate of interest and equilibrium level of output.

The Money market and the Capital market are critical elements of the financial market at large. Both are required for the betterment of the economy and to fulfill companies' needs, be it short-term or long-term. Depending on what their needs are, businesses tap into the markets accordingly.

Foreign exchange markets allow for the trading of foreign currencies, using instruments such as spot transactions, futures, forwards, and swaps. Money markets link international lenders of short-term funds with borrowers using instruments such as Eurocurrencies and Eurobonds.

Money markets include markets for such instruments as bank accounts, including term certificates of deposit; interbank loans (loans between banks); money market mutual funds; commercial paper; Treasury bills; and securities lending and repurchase agreements (repos).