In this corner, we have a financial market that trades in securities and helps corporations stay funded. In this corner, we have a financial market that trades in securities and helps corporate entities stay--wait a minute!
At a quick glance, capital market vs money market seems as even a matchup as Mayweather vs Pacquiao. If you look closer, though, both wear different gloves in the ring.
But what is a capital market? What's a money market? What's the difference?
Well, put up your dukes and listen for the bell because we're about to get started.
The dictionary defines a market as a place where buyers and sellers come together to trade. In a capital market, the sellers are often corporations dealing in equity.
Buyers, also known as investors, then purchase that equity, usually in the form of a corporate bond or stock. The investors can then trade those assets among themselves, creating a secondary market.
The sale of a corporate bond or stock generates capital for that corporation. They then use that capital to fund long-term projects, such as a merger. Investors also use capital market returns for long-term goals, such as retirement.
Capital markets are the most well known. Think Wall Street or the Tokyo Stock Exchange. Analysts use them as a barometer to measure the world's economic health.
Capital markets also carry with them a high risk. But with that risk comes a greater reward.
We've mentioned that both capital markets and money markets trade in securities. However, they don't trade the same securities.
Capital markets use corporate bonds and stocks. Money markets use deposits and bills of exchange.
Another difference? Money markets are where the government does its trading, in the form of government bonds.
Why does the government only trade in money markets? It's because money markets are low-risk. Granted, it also means investors don't get as large of a return.
Money markets function as a way to raise short-term funds. For the government, it allows them to manage their money and execute financial policy. For businesses, banks, in particular, money markets provide working capital to cover expenses.
That question depends on you. As a general rule, the money market timeframe is less than a year, while the capital market timeframe is one year or longer.
If you want to save for retirement, put your kid through college, raise capital for a future business venture, the capital market is the place for you. If you want a safe, quick payout, go to the money market.
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