Importance of Money market vs capital market
A financial market facilitates trade in financial assets such as bonds, stocks, derivatives, currencies, and commodities between buyers and sellers(Money market vs capital market). Fixing prices of these assets for global trade, increasing capital, and transferring risk and liquidity are some of the objectives of the financial markets.
There are several components of financial markets but the most important of them are the money market and capital market. The money market is set up to deal with only short-term financial exchanges and their instruments, and the capital market deals with long-term financial instruments and their exchanges.
Let’s get start with the Money market vs capital market:
Importance of Money market
- Some examples of financial instruments that work for the short term are financial institutions, bill brokers, money lenders, banks, etcetera, and they are referred to as the money market.
- The wholesale market is the name used more often to describe the importance of money market. In a money market, borrowing and lending are for a period as short as overnight and not more than a year.
- To park their money for a short period, individuals, banks, companies, and governmental organizations turn to the money market. The money market’s most important duty is to provide the cash required by individuals, companies, and governmental organizations for their various purposes.
- The returns in a money market are modest, and risks are low. Deposits, collateral loans, acceptances, and bills of exchange are some of the financial instruments used in the money market. The money market has various institutions operating in it such as the Federal Reserve, commercial banks, and acceptance houses.
- An organization such as a company or government provides debt from time to time on a short-term basis to cover the routine expenses of an individual or company and also supplies working capital.
- The money market is a key player in maintaining liquidity in the market. Individual investors can use money markets to save their money in a safe and accessible place.
Importance of Capital market
- The capital market deals mainly in bonds and stocks. The capital market such as the stock market is evaluated and monitored on an hourly basis and if the market is doing well it is a sign of the good health of the economy.
- The status of every company and industry and their whereabouts and short-term future is a matter of study in a capital market.
- The most important aspect of a company or industry in a capital market is to raise capital for its long-term goals. These companies use this capital for expansion.
The primary capital market and secondary capital market
When a company issues some stocks or some new bonds they put them in the primary capital market and if the buyer of these stocks and bonds wants to sell them again they put those stocks and bonds in the secondary capital market.
Difference between Money market and Capital Market
These are the difference between money market and capital market :
- The money market deals with short-term securities whereas capital markets deal with long-term securities.
- Money markets are not so well organized whereas capital markets are well organized
- The money market provides high liquidity in the financial market whereas the capital market provides low liquidity in the financial market.
- High liquidity and low maturity period make the money market less risky whereas capital markets are the high-risk market.
- Central banks, commercial banks, and none financial institutions are the main components of a money market whereas commercial banks, stock markets, and non-banking organizations work in the capital market
- The money market provides working capital to individuals, and companies and makes sure there is the availability of capital in the short term whereas capital markets provide long-term financing and allocate a fixed capital for the purchase of land, property, machinery, building, etcetera.
- The money market makes sure there is liquidity in the financial market whereas the capital market works as a stabilizing system in the economy
- The returns in the money market are low as compared to the capital market.