Financial markets: capital and money markets.
A financial market brings buyers and sellers of traded financial assets, such as stocks, bonds, commodities, derivatives and currencies. The purpose of financial markets is to set prices for global trade, raise money, transfer liquidity and risk. Although financial markets have many components, the two most commonly used are money markets and capital markets.
In the short term, money markets are used by governments and corporate entities as a means of borrowing, usually for more than a year. On the contrary, capital markets are more often used for long-term assets, those that are longer than one year. Capital markets include stocks (stocks) and bonds (bonds). 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
The capital market may be a widely watched market. Both the stock market and the bond market are closely followed, and their daily trends are analyzed as a proxy for the overall economic situation in the world market. As a result, 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 the capital markets can raise funds for long-term purposes, such as mergers and acquisitions, expansion of business or new business, or other capital projects. The entity that raises money for these long-term purposes comes 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 money through stock offerings. Government entities are generally not held publicly, and therefore are often not fair. Companies and government entities that issue shares or debt are considered 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 first puts the securities on the market, the market is called the main market. On the contrary, if the securities have been issued, they are now trading between buyers, which is in the secondary market. Although the seller does have an interest in the outcome of the securities in the secondary market, the seller makes money in the primary market (rather than the secondary market).
Buyers of capital market securities tend to use funds for long-term investment objectives. Capital markets are risky markets and are not usually used for short-term funding. As long as investors have a long time horizon, many investors enter the capital market to save retirement or education. (for related readings, see the type and role of the financial market.)
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 the capital markets include stocks and bonds, but the instruments used in money markets include deposits, mortgages, and acceptance bills. The institutions that operate in money markets are central Banks, commercial Banks and acceptance houses.
Money markets provide a variety of functions for individuals, companies, or government entities. Liquidity is usually the main purpose of entering money markets. When short-term debt is issued, it tends to be 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 invest money overnight and seek money markets to achieve that, or they may need to pay wages and seek help in the money markets. 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 considered low risk; Risk-averse investors are willing to take advantage of liquidity availability. Individuals living in fixed income typically use money markets because of the safety associated with these types of investments.
The bottom line
There are differences and similarities 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 sufficient capital 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 and money markets provide safer assets; Money market returns tend to be low but stable, with higher returns on capital markets. The size of capital market returns is often directly correlated with risk levels, but this is not always the case. (see also: financial concept: risk/return tradeoff.)
Although the market is effective in the long run, short-term inefficiency enables investors to take advantage of anomalies and achieve higher returns, which may be disproportionate to risk levels. These anomalies are what capital market investors are trying to uncover. Although money markets are considered safe, they occasionally have negative returns. The unexpected risks, while unusual, highlight the inherent risks of investing – either in money markets or in short-term or long-term investments in capital markets.