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Capital markets and money markets are two different kinds of financial markets. In order to understand the difference between the two, it can be helpful to understand how each market operates. Capital markets are those that provide businesses, firms, governments, and other organizations with securities for long-term financial growth. Money markets, on the other hand, are markets that provide short-term funding for banks and other financial organizations. The primary difference between them is that capital markets are used for long-term financial growth and stability and money markets are used for short-term lending and borrowing.
The financial instruments used in these two markets differ since the function of each is different. Capital markets, which are often used for long-term investments, contains items such as stocks and bonds. These are instruments in which governments or financial organizations may invest in order to allow value to increase over time, thereby improving the overall value of their assets. The financial instruments used in money markets may include deposits and commercial paper for financial agreements, such as car loans and mortgages.
The difference between these markets is made more clear when the market maturity of the financial instruments is taken into account. The stocks and bonds that are traded in the capital market have maturity periods that can last for years and years. Instruments in the money markets, on the other hand, normally have maturity periods that are no longer than 13 months.
Capital markets normally include two separate markets. The first consists of stocks, bonds, and other assets that are sold to investors for the first time. The second includes assets that are already securities invested in by governments or financial organizations and which are traded to other organizations.
Money markets are closely related to the cash flow that financial organizations, such as banks, depend on to function. Most of the trading in these markets occurs between banks that borrow from and lend to one another. In some cases, large businesses that have very high credit ratings may also trade money market assets and instruments because they can back their assets with their own credit.
While both of these markets tend to be regulated by governments and global organizations, the potential problems and obstacles for capital markets and money markets are different. Capital markets are regulated to protect investors from problems such as fraud. Money markets are typically regulated to prevent the occurrence of a liquidity crisis in which assets may be difficult to turn into cash, halting the funding required by participating organizations.
Liquidity can be a major problem with money markets. We just saw a good, clear example of that during the most recent recession, didn't we? When risky loans are made, there's a chance a lot of people at once won't pay it back and that can paralyze lending.
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