Financial markets: capital and money markets
A financial market brings buyers and sellers into trading financial assets such as stocks, bonds, commodities, derivatives and currencies. The purpose of financial markets is to set prices for global trade, raise money, and transfer liquidity and risk. Although financial markets have many components, the two most commonly used are money markets and capital markets.
Money markets are used by government and corporate entities as a means of borrowing and lending in the short term, usually to hold up to a year’s worth of assets. On the contrary, capital markets are more often used for long-term assets, which are assets of more than one year. Capital markets include the stock market and the bond market. Money markets and capital markets together form the bulk of financial markets, often used together to manage the liquidity and risk of companies, governments and individuals.
The capital market
Capital markets may be a widely watched market. Both the stock market and the bond market are closely followed, and their daily trends are analysed as representative of the overall economic situation in the world market. Thus, the institutions that operate in the capital markets – the stock exchanges, commercial Banks and all types of companies, including non-banks such as insurance companies and mortgage Banks, are scrutinized.
Institutions operating in capital markets can raise funds for long-term purposes, such as mergers and acquisitions, expansion of business or new businesses, or other capital projects. Entities that raise money for these long-term purposes come to one or more capital markets. In the bond market, companies may issue bonds in the form of corporate bonds, while local and federal governments may issue bonds in the form of government bonds. Similarly, companies may decide to raise funds through stock offerings. Government entities are usually not publicly held, and therefore are generally not fair. Companies and government entities that issue shares or debts are seen as sellers of these markets. (see: what’s the difference between debt and stock market?)
The buyer or investor purchases the seller’s shares or bonds and trades. If the seller or issuer is to put the securities on the market for the first time, the market is called the main market. On the contrary, if the securities have been issued and are now being traded between buyers, it is in the secondary market. Although the seller has a stake in the securities outcome of the secondary market, the seller makes money in the primary market (rather than the secondary market).
Capital market securities buyers tend to use funds for long-term investment objectives. Capital markets are risky markets and are not usually used to invest in short-term funds. As long as investors have a long time horizon, many investors enter the capital market to save retirement or education. (for related reading, see financial market types and their roles.)
The money market
Money markets usually enter with capital markets. While investors willing to take on more risk, and have the patience to invest the capital market, but the money market is a good platform, can in a relatively short period of time (usually one year or shorter time) the funds needed for the “park”. The financial instruments used in capital markets include stocks and bonds, but money markets use instruments including deposits, mortgages, and acceptance drafts. The institutions that operate in money markets are central Banks, commercial Banks and acceptances.
Money markets provide a variety of functions for individuals, companies, or government entities. Liquidity is often the main purpose of entering money markets. When short-term debt is issued, it is often a company or government that covers operating expenses or working capital for the purpose, rather than capital improvements or large projects. Companies may want to put money overnight and seek money markets to achieve that, or they may need to pay wages and seek help in the money market. Money market in ensuring that companies and governments to maintain adequate liquidity level plays a key role day after day, there is no lack of, need more expensive loans, no extra money, missed the opportunity to gain money interests. (see also: money market tools.)
On the other hand, investors use money markets to invest money in a safe way. Unlike capital markets, money markets are perceived as low risk; Risk-averse investors are willing to take the liquidity available. Individuals living in fixed income typically use money markets because of the safety of these types of investments.
The bottom line
There are similarities and differences between capital markets and money markets. From the point of view of the issuer or the seller, both markets provide the necessary business function: to maintain adequate funding levels. The goal of the seller to enter each market depends on their liquidity needs and time range. Similarly, investors or buyers have unique reasons to go to each market: capital markets offer riskier investments, while money markets provide safer assets; Money market returns tend to be lower but stable, with higher returns on capital markets. The size of capital market earnings tends to be directly correlated with risk levels, but this is not always the case. (see also: financial concepts: risk/return tradeoff.)
Although the market is effective in the long run, short-term inefficiency enables investors to take advantage of anomalies to achieve higher returns, which may be disproportionate to the risk level. These anomalies are what capital market investors try to expose. Although money markets are considered safe, they occasionally have negative returns. Inadvertently, while unusual, it highlights the risks inherent in investing – either in money markets or in short-term or long-term investments in capital markets.