What is financial market? What are the key difference in the Money Market and Capital Market
Overview of Financial Market
Financial Market stabilizes the money supply by lending borrowing mechanism that is borrowers by the lenders. The financial market is a market in which people trade financial securities and derivatives at low transaction costs and people will trade in shares, debentures, bonds, derivatives, currencies etc.
Money Market and Capital Market
Both Money Market and Capital market are the part of the financial markets. That channelize funds and to generate returns.
In the money market we use the financial instrument for the short period that should be less than one year. In Money market securities are essentially issued by governments, financial institutions, and large corporations. In money market we normally deal in promissory note, bills, commercial paper and bonds etc.
The Capital Market is the second type of the financial market where we can trade in stocks, bonds and debentures for both short period and long period. The Stock market divided by in two categories
1) Primary Stock Market: In this category the securities are offered by fresh issue to the public that is called IPO (Initial Public Offer)
2) Secondary Stock Market: In this Secondary Stock Market the issued securities are traded between the investors that is Buyer and Seller.
Key difference in the Money Market and Capital Market
1) Definition: In the money market the lending and borrowing take place for the short time i.e. less than one year. In the capital market the lending and borrowing takes place for the both short term and long term.
2) Structure: Money markets are an unstructured and unregulated market where banks, financial institutions, money dealers and brokers trade in financial instruments. While the Capital Market is well structured market and you can invest for long term with high return.
3) Investor type: Money Market contains central bank, commercial bank, financial companies and cheat funds etc. In the other side the capital market involves mutual funds, commercial banks, stock exchange, Stock broker etc.
4) Instruments: The main Instruments of the Money Market are promissory note, bills, commercial paper and bonds. The Stock Market Instruments are equity stocks, bonds, preference shares and debentures.
5) Time Period: The Money market time period is up to one year. No time limit in The Capital market you can invest for long time 3-5-10-15 years and so on.
6) Return: The returns of the investment are usually low in Money Market. In the capital market the returns of the investment is higher for the long term instrument.
7) Risk: Due to high liquidity and low duration of maturity in money markets, Instruments in money markets are a low risk. Whereas capital markets are the comparatively high risk.
Both Money Market and Capital Market are required for the betterment of the economy as they fulfill the long-term and short-term capital needs of the business and industry. The markets encourage individuals to invest money to gain good returns.