Money Markets:
Nature of Instruments:
Money markets deal with short-term debt instruments and securities, typically with maturities of one year or less. Examples include Treasury bills, commercial paper, and certificates of deposit.
Participants:
Participants in the money market are often financial institutions, governments, and large corporations. Individual investors are less common in this market.
Purposes:
The primary purpose of the money market is to facilitate the borrowing and lending of short-term funds for liquidity and working capital needs.
Risk Profile:
Generally considered lower risk compared to capital markets due to the short-term nature of the instruments.
Market Size:
Money markets are generally larger in terms of transaction volume compared to capital markets.
Example:
A corporation issues commercial paper to raise funds for its short-term operational needs. Investors, such as money market funds, purchase the commercial paper for a specified period, and the corporation repays the principal amount with interest.
Capital Markets:
Nature of Instruments:
Capital markets deal with long-term financial instruments, including stocks, bonds, and other securities with maturities exceeding one year.
Participants:
Participants in capital markets include individual investors, institutional investors, corporations, and governments.
Purposes:
Capital markets serve the purpose of raising long-term capital for businesses and governments. Investors in capital markets are typically looking for long-term returns and may take an ownership stake in companies through stocks.
Risk Profile:
Generally, involves higher risk compared to money markets due to the longer investment horizon and the potential for market fluctuations.
Market Size:
Capital markets, while substantial, may have lower transaction volumes compared to money markets due to the longer holding periods of securities.Example:
A company issues corporate bonds to raise funds for a major expansion project. Investors purchase these bonds, receiving periodic interest payments and the return of principal at maturity. The company uses the raised capital for long-term investment.
In summary, money markets deal with short-term instruments for liquidity needs, while capital markets focus on long-term instruments for raising capital for significant investments. Both markets play crucial roles in the overall functioning of the financial system.