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Financial markets: Capital vs.

Money Markets
By Kristina Zucchi, CFA | Updated January 2, 2018 — 9:58 AM EST SHARE

A financial market brings buyers and sellers together to trade in financial assets such as stocks,
bonds, commodities, derivatives and currencies. The purpose of a financial market is to set prices for
global trade, raise capital, and transfer liquidity and risk. Although there are many components to a
financial market, two of the most commonly used are money markets and capital markets.

Money markets are used by government and corporate entities as a means for borrowing and
lending in the short term, usually for assets being held for up to a year. Conversely, capital markets
are more frequently used for long-term assets, which are those with maturities of greater than one
year.

Capital markets include the equity (stock) market and debt (bond) market. Together, money markets
and capital markets comprise a large portion of the financial market and are o!en used together to
manage liquidity and risks for companies, governments and individuals.

Capital Markets
Capital markets are perhaps the most widely followed markets. Both the stock and bond markets are
closely followed, and their daily movements are analyzed as proxies for the general economic
condition of the world markets. As a result, the institutions operating in capital markets – stock
exchanges, commercial banks and all types of corporations, including non-bank institutions such as
insurance companies and mortgage banks – are carefully scrutinized.

The institutions operating in the capital markets access them to raise capital for long-term purposes,
such as for a merger or acquisition, to expand a line of business or enter into a new business, or for
other capital projects. Entities that are raising money for these long-term purposes come to one or
more capital markets. In the bond market, companies may issue debt in the form of corporate
bonds, while both local and federal governments may issue debt in the form of government bonds.

Similarly, companies may decide to raise money by issuing equity on the stock market. Government Trading Center
entities are typically not publicly held and, therefore, do not usually issue equity. Companies and
government entities that issue equity or debt are considered the sellers in these markets. (See also:
What Are the Di!erences Between Debt and Equity Markets?)
The buyers (or the investors) buy the stocks or bonds of the sellers and trade them. If the seller (or
issuer) is placing the securities on the market for the first time, then the market is known as the
primary market.

Conversely, if the securities have already been issued and are now being traded among buyers, this
is done on the secondary market. Sellers make money o" the sale in the primary market, not in the
secondary market, although they do have a stake in the outcome (pricing) of their securities in the
secondary market.
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The buyers of securities in the capital market tend to use funds that are targeted for longer-term Learn to trade stocks by investing $100,000 virtual
investment. Capital markets are risky markets and are not usually used to invest short-term funds. dollars...

Many investors access the capital markets to save for retirement or education, as long as the
investors have lengthy time horizons. (For related reading, see Types of Financial Markets and Their
Roles.)

Money Market
The money market is o!en accessed alongside the capital markets. While investors are willing to
take on more risk and have patience to invest in capital markets, money markets are a good place to
"park" funds that are needed in a shorter time period – usually one year or less. The financial
instruments used in capital markets include stocks and bonds, but the instruments used in the
money markets include deposits, collateral loans, acceptances and bills of exchange. Institutions
operating in money markets are central banks, commercial banks and acceptance houses, among
others.

Money markets provide a variety of functions for either individual, corporate or government entities.
Liquidity is o!en the main purpose for accessing money markets. When short-term debt is issued,
it's o!en for the purpose of covering operating expenses or working capital for a company or
government and not for capital improvements or large-scale projects. Companies may want to
invest funds overnight and look to the money market to accomplish this, or they may need to cover
payroll and look to the money market to help.

The money market plays a key role assuring companies and governments maintain the appropriate
level of liquidity on a daily basis, without falling short and needing a more expensive loan or without
holding excess funds and missing the opportunity of gaining interest on funds. (See also: Money
Market Instruments.)

Investors, on the other hand, use money markets to invest funds in a safe manner. Unlike capital
markets, money markets are considered low risk; risk-averse investors are willing to access them
with the anticipation that liquidity is readily available. Those individuals living on a fixed income
o!en use money markets because of the safety associated with these types of investments.

The Bottom Line


There are both di"erences and similarities between capital and money markets. From the issuer or
seller's standpoint, both markets provide a necessary business function: maintaining adequate
levels of funding. The goal for which sellers access each market varies depending on their liquidity
needs and time horizon.

Similarly, investors or buyers have unique reasons for going to each market: capital markets o"er
higher-risk investments, while money markets o"er safer assets; money market returns are o!en low
but steady, while capital markets o"er higher returns. The magnitude of capital market returns o!en
has a direct correlation to the level of risk, but that's not always the case. (See also: Financial
Concepts: The Risk/Return Tradeo!.)

Although markets are deemed e"icient in the long run, short-term ine"iciencies allow investors to
capitalize on anomalies and reap higher rewards that may be out of proportion to the level of risk.
Those anomalies are exactly what investors in capital markets try to uncover. Although money
markets are considered safe, they have occasionally experienced negative returns. Inadvertent risk,
although unusual, highlights the risks inherent in investing – whether putting money to work for the
short-term or long-term in money markets or capital markets.
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