Both Money and Capital Markets are components of financial markets. The markets facilitate traders to borrow, lend assets in the short-term (a year or less), and provide a market for assets maturing for more than a year (long-term assets). These financial markets are modeled to link traders with surplus income to companies that are on the lookout for business opportunities that need funding. However, how the transaction is recorded, loan duration and the expected return rate differ per individual situation. These processes can take place in various ways however, the commonly used phrases for these investments, are money and capital markets. In other words, the money and capital markets though perform similarly their functions differ. It is, therefore, important for a trader to understand their core differences before making critical investment decisions. We have written this article on the money market and capital market to make sure that you get everything you need to know before investing. In this post, we will look at the topics below,

• What is the Money Market?
• Who uses the Money Market?
• What are the Benefits of Using the Money Market?
• How can Retail Investors Access the Money Market?
• How Understanding the Money Market Can Help Investors
• What is the Capital Market?
• Who Uses the Capital Market?
• What are the Benefits of Using the Capital Market?
• How Can Retail Investors Access the Capital Market?
• How Understanding the Capital Market Can Help Investors

Here we go.

What is the Money Market?

The Money Market can be simply described as a Lower-Risk Investment that is Short-Term i.e. its deals last between a day and one year where short-term debt is involved. I know you are wondering, what short-term debt could be?

 Well, Short-term debt refers to any liability that is payable in less than a year. The instruments of the transaction include Money Market Funds, Repos or repurchase agreements, Certificate of deposit, forex trading or currency swaps, commercial papers, and Bank or Central Bank Loans.

Who uses the money market?

Large firms or institutions do the trade where investors look to gain some returns on their excess funds. On the other hand, the institutions want to plug up short-range holes on balance sheets. However, it is not only financial gains that drive investors to the Money Market. There are many other reasons.

Banks can also use Money Market to have better margins on funds compared to the central bank rates. Once a bank identifies a client who has some short-term funds challenges, it steps in to offer a short-term loan to assist the client to stabilise for mutual benefit. Central banks can also step into the Market to stabilise financial markets. 

Huge corporations are other beneficiaries of the market, especially where cash flow issues arise due to tight budgets.

Governments participate in the market to provide liquidity and stability. Any squeeze on the market flow can disrupt the market therefore; governments step in to offer financial support to the participants. Apart from that, governments can find themselves in a tight corner financially, hence the need for investors in the money market.

What are the Benefits of using the Money Market?

Holding excess funds can incur some opportunity costs if not put on check. Therefore, instead of having idle cash in your savings account, you can invest and get better return rates. 

Another benefit is that central banks and governments come into the market by providing short-term loans to offer liquidity and avoid default risk. Doing this ensures efficient flow of financial systems. However, the money market operates around the clock and the demand, supply, or other factors can influence the rates. 

How can Retail investors access the Money Market?

Generally, Retail Investors avoided venturing into the money market because the rates are not much different than the ones on savings accounts. In addition, investors without sizeable trading balances are unable to benefit from this market segment. It does not end there; there are also funds withdrawal restrictions once the investors’ funds are locked in.

However, not all hope is gone, because there are certain money market segments or instruments where one can invest and get some marginal good rates. They include Mutual funds, Money Market Funds, Bonds, Municipal Funds, Money Market Accounts, and Certificates of Deposit.

How understanding the Money market can help Investors

The money market can be termed as a risk-averse undertaking but beneficial in diverse ways. To lower your risks, you can add some instruments to your money market trading portfolio.

One way money markets can help is by acting as a leading indicator. The pressure points included can be an indicator that the market is under stress. If there is no liquidity or the rates fluctuate, it is an indication that both lenders and borrowers are fearful of CCR (Counterparty Credit Risk). The CCR can have negative consequences on other asset prices. It is important to note that rates in the money market vary depending on the individual country’s base rate. 

What is the Capital Market?

In this financial market segment, i.e. the Capital Market a wide range of markets are covered. A capital market is a market where you can buy and sell financial assets. The market is very crucial because it supports economic growth across the globe. If you have spare funds, then this is the market to consider. However, it is important to evaluate the merits and demerits of the available opportunities. Also, consider what to gain before making the investment move. The Capital Market is a long-term debt investment. Let us understand what Long-term debt means.

Long-term Debt involves debt or agreement that is executed amongst borrowers and Investors for duration that is longer than one year. The capital market has various financial assets and instruments that are reflective of the agreement. They include direct loans, bonds, and equity-linked instruments. What do bonds and equities mean? Bonds stand for the agreements of returning the primary capital stake including predetermined return rates on a specific date. On the other hand, equities are the entitlements for traders to get a share of the future profits of a company.

There are real-life capital market examples where deals are sealed both privately and publicly. They are all over the world wherein some designated financial centers there are specialist exchanges that regulate all the activities. Some of these capital market examples are stock exchanges such as New York Stock Exchange, London Stock Exchange, and Nasdaq. There also exist off-exchange deals between entities such as where an investment bank can buy or sell bonds to another bank.

Who uses the Capital market?

Making a substantial amount of returns from the capital market is the driving force behind the many entities that use the market. The market is easily accessible because you do so through online trading platforms. The users include retailers, banks, governments, institutions, and corporations.

Corporations can find themselves on either side of the investment. The firms can buy bonds or shares from another firm. To fund their long-term and medium opportunities, the corporations can issue their equities, bonds, or debt.

Some investment banks can have proprietary investments. Their specialists in various fields use the banks’ funds to conduct trades in the capital market thereby making some returns on the invested capital. 

Big industries make huge returns from the capital markets. The investment segments could be hedge funds, pension funds, or diverse asset classes that could be used to generate consistent returns.

Governments world over can use capital markets to invest with the view of generating reasonable returns from the surplus at their disposal. They can also issue government bonds to stabilize the market.

What are the Benefits of using the Capital market?

The capital market helps in the allocation of capital efficiently among the concerned entities. Each entity’s problems or needs are met, triggering economic growth and stability.

It helps investors in improving the return on the capital invested. However, it is should be noted that there is a possibility of losing some or even all the initial capital. 

The market enables to fund both long-term and medium projects by borrowing from the capital markets.

Both equities and bonds have roles to play in the capital markets. 

Bonds’ role on the capital markets: Bonds will create a downside on the balance sheet hence a possibility of creating a financial liability. The move can dent a firm or nation’s credit rating. Bonds’ returns are fixed therefore, there is a possibility of an investor missing out if the company fails to take off. The good thing is that if the issuer of the bond does not fail to pay the debt your initial capital will be safeguarded or secure. 

Equities on the Capital Markets: a company can issue out equities to absorb more debt but the firm must give up considerable control over the company including a share of the future profits. However, it is important to whether it is worth the trouble. Carrying out some basics to measure if the firm’s equity is over or under-valued is essential. Some of the pointers to use include value stocks, P/E ratios, and growth stocks.

How can Retail investors access Capital Markets?

Online brokers have made it easy for retail investors to access the capital market. Any individual can create an account and start trading immediately. Most of these online brokers are user-friendly in that they can be accessed through mobile phones and desktops. In the capital market, you can access various assets. For those who are interested in investing in forex, both fiat and cryptocurrencies are there. Do you want to make some returns trading indices? Online brokers offer exactly that. Other asset groups are equities and ETFs.

In the capital markets, we have primary and secondary market segments where retail investors can access the market. 

Primary markets: it is a market where traders and companies transact directly. An IPO (Initial Public Offering) where a company can sell its shares to traders or investors is a good example. 

A secondary Market: this is a market where traders transact assets between themselves i.e. trading listed shares. 

Retail investors can also use copy trading to trade. What is Copy Trading?

Copy-trading: it is a trade where the investors can replicate or copy trading actions of others in their portfolios. They can also use workings to develop and manage a trading strategy. There is also a variety of tailored smart portfolios across various online platforms.

To manage your capital market Portfolio it is important to use the most cost-effective method. It is equally, vital to use portfolio diversification and some risk management procedures. 

How understanding the capital market can help investors

The Capital Market consists of very many market segments meaning that it is so huge to the extent of being a major economic driver. As of 2020 August, the global bond market stood at $128 trillion according to International Capital Market Association (ICMA). Another fact that proves that the market is so huge is the size of the equity market. By 2020 November, global equity markets stood at around $95 trillion according to Apollo Global Management Market Association (AGMMA). 

It is important to study diverse segments of the capital market to assist investors in picking up the trends and opportunities of trade. An inverted yield on bonds is a sign that the equity market might experience price correction soon in a fixed market. 

What are the Key Differences between Money Market and Capital Market?

As we conclude, let us highlight some key differences between the two financial markets.

The Money market involves the trading of short-term securities whereas the Capital market involves trading of long-term securities.

We have high liquidity in the Money Market however; the liquidity is somehow low in the Capital Market.

There is more organisation on the Capital market but the money markets are not so organised.

Money Markets offer liquidity to the economy whereas Capital Markets offer stability to the economy through savings mobilization and long-term financing.

In Capital Markets, the returns are higher compared to money markets where the returns are low.

After going through the whole post, the following conclusions are obvious. The two are components of financial markets. They all support the economy. Both market segments offer investors the opportunity to returns from their investment. Finally, it is upon each investor to choose the market that suits them depending on the amount invested and the outcome.

DISCLAIMER: This information is not considered as investment advice or an investment recommendation, but is instead a marketing communication