Money
markets are used for a short-term basis, usually for assets up to one
year. Conversely, capital markets are used for long-term assets,
which are any asset with maturity greater than one year. Capital
markets include the equity (stock) market and debt (bond) market.
Together the money and capital markets comprise a large portion of
the financial market and are often used together to manage liquidity
and risks for companies, governments and individuals.
Capital
Markets
Capital markets are perhaps the most widely followed markets. Both the stock and bond markets are closely followed and their daily movements are analysed as proxies for the general economic condition of the world markets. As a result, the institutions operating in capital markets - stock exchanges, commercial banks and all types of corporations, including nonbank institutions such as insurance companies and mortgage banks - are carefully scrutinised.
Capital markets are perhaps the most widely followed markets. Both the stock and bond markets are closely followed and their daily movements are analysed as proxies for the general economic condition of the world markets. As a result, the institutions operating in capital markets - stock exchanges, commercial banks and all types of corporations, including nonbank institutions such as insurance companies and mortgage banks - are carefully scrutinised.
The
institutions operating in the capital markets access them to raise
capital for long-term purpose, such as for a merger or acquisition,
to expand a line of business or enter into a new business, or for
other capital projects. Entities that are raising money for these
long-term purposes come to one or more capital markets. In the bond
market, companies may issue debt in the form of corporate bonds,
while both local and federal governments may issue debt in the form
of government bonds. Similarly, companies may decide to raise money
by issuing equity on the stock market. Government entities are
typically not publicly held and, therefore, do not usually issue
equity. Companies and government entities that issue equity or debt
are considered the sellers in these markets.
The
buyers, or the investors, buy the stocks or bonds of the sellers and
trade them. If the seller, or issuer, is placing the securities on
the market for the first time, then the market is known as the
primary market. Conversely, if the securities have already been
issued and are now being traded among buyers, this is done on the
secondary market. Sellers make money off the sale in the primary
market, not in the secondary market, although they do have a stake in
the outcome (pricing) of their securities in the secondary market.
Money
Market
The money market is often accessed alongside the capital markets. While investors are willing to take on more risk and have patience to invest in capital markets, money markets are a good place to "park" funds that are needed in a shorter time period - usually one year or less. The financial instruments used in capital markets include stocks and bonds, but the instruments used in the money markets include deposits, collateral loans, acceptances and bills of exchange. Institutions operating in money markets are central banks, commercial banks and acceptance houses, among others.
The money market is often accessed alongside the capital markets. While investors are willing to take on more risk and have patience to invest in capital markets, money markets are a good place to "park" funds that are needed in a shorter time period - usually one year or less. The financial instruments used in capital markets include stocks and bonds, but the instruments used in the money markets include deposits, collateral loans, acceptances and bills of exchange. Institutions operating in money markets are central banks, commercial banks and acceptance houses, among others.
Money markets provide a variety of functions for either individual, corporate or government entities. Liquidity is often the main purpose for accessing money markets. When short-term debt is issued, it is often for the purpose of covering operating expenses or working capital for a company or government and not for capital improvements or large scale projects. Companies may want to invest funds overnight and look to the money market to accomplish this, or they may need to cover payroll and look to the money market to help. The money market plays a key role in ensuring companies and governments maintain the appropriate level of liquidity on a daily basis, without falling short and needing a more expensive loan or without holding excess funds and missing the opportunity of gaining interest on funds.
