The Difference between the Money Market and the Capital Market

A financial market connects buyers and sellers together and enables them to trade financial assets like stocks, bonds, currencies, derivatives, and commodities. However, there are actually different names for different kinds of markets. Learn how these markets differ from each other and what investors and companies do within them. 

The Money Market 

The money market is usually accessed alongside the capital markets. Although the investors are willing to take on some risks in the capital markets, money markets are particularly good place to park the funds that are needed in the shorter term, which is usually a year or shorter.

Among the financial instruments that can be used in the capital markets are stocks and bonds, but the instruments used in the money markets include deposits, acceptances, collateral loans, and bills of exchanges. 

The institutions that operate in the money markets include commercial banks, acceptance houses, and even central banks. 

For Liquidity 

The money markets offer plenty of functions for individual, government, and corporate entities. The main goal of accessing money markets is usually liquidity. When short term debt is given, it’s usually for covering operating expenses or working capital for a company or government and not for capital improvements or large scale projects. 

Companies may aim to invest funds overnight and look to the money market to achieve this or they may want to cover payroll and look to the money market for help. 

Them money market has a key function in ensuring that companies and governments maintain the right daily liquidity level. 

For Safety 

Meanwhile, for investors, the money market funds provide relative safety for their money. Money markets are considered low risk, meaning risk-averse investors are willing to access them with the expectations that liquidity is immediately available. 

The Capital Markets 

The capital markets are arguably the most widely followed markets. Both the stock and bond markets are tracked and their daily movements are analyzed as proxies for the general economic condition of the world markets.

Therefore, the institutions operating in the capital markets are carefully checked. These institutions include stock exchanges, all types of corporations, commercial banks, and even non-bank entities like insurance companies and mortgage banks.

For Raising Funds 

The institutions that operate in the capital markets access them in order to raise capital for the long term, like mergers and acquisitions, expanding a line of business, or entering a new business, or any other capital projects. 

These entities that raise money for the long term go to one or more capital markets. Meanwhile, 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. 

In a similar fashion, the entities may decide to raise funds by issuing equities on the stock market. The government entities are usually not publicly held and thus do not usually issue equities. The corporations and governments that issue equities are considered sellers in these types of markets. 

Primary vs. Secondary Capital Markets 

If the seller or issuer is placing the securities on the market for the first time, then the market is called the primary market, in which securities are firstly made or offered. 

Meanwhile, if the securities have already been issued and are now being traded among buyers, this is performed on the secondary markets.