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Capital Market and Money Market, Know the Differences!

Capital Market and Money Market, Know the Differences!

You have heard a lot about the capital market and money market. Both are equally investment-friendly trading venues. But there is a clear difference in the way money markets and capital markets operate.

It makes it easier to select products that best meet your current investment objectives when you understand how the money market and capital markets differ. In its own understanding, the money market is a market as a trading venue, usually involving banks or other non-banking institutions for less than one year or short-term investments.

On the other hand, the capital market is a market that represents the place where investors meet companies and businesses that need capital. Investment contracts shall usually be entered into for the purpose of an investment over a period of at least one year.

Differences between Capital Market and Money Market

At first glance, the capital market and money market look the same. Both are places where investors and people in need of funds gather. However, there are differences between the money market and the capital market.

1. Period

The first very obvious difference is time. The money market period is as short as it is: less than a year. Transactions between fund owners and borrowers last only a short period of time. In contrast, the vast majority of trades offered in capital markets are longer term with durations exceeding one year and sometimes as long as ten years.

2. Instrument Selection

Naturally, the investment tools used are also different. Financial instruments such as Treasury bills, commercial papers (CP), certificates of deposit, bank receipts, and money market notes are available in the money market. Meanwhile, mutual funds, bonds, stocks, derivative products, exchange traded funds and ETFs are part of the product selection fund on the capital market.

3. Market Liquidity

From a market liquidity perspective, funds invested in money market instruments are more liquid than those in the capital markets. This, too, is due to the time difference between them.

4. Risk

In terms of risk level, investment products in the capital markets are riskier. On the contrary, short term money markets have a low level of risk because of their high short-term liquidity. Including minimal investment risk.

5. Return

There are a lot of better yields or potential earnings in the capital markets compared to money markets. The only source of profit in the financial markets is interest. In contrast, profit is generated in the equity market through coupons, dividends, capital gains, bonuses and so on. So, not surprisingly, capital markets are more profitable than money markets. However, money market investments still have attractive profit potential.

6. Purpose of Investment

Both the money market and the capital market can be profitable investment venues. Short term money markets are better suited to the interests of those who wish to invest in shorter time frames, according to their investment objectives.

Withdrawal of funds is fast, so you can withdraw immediately when you need funds urgently. There is a case to be made for making the capital market an integral part of longer-term investment. It takes patience to ripen, but because of its high yield.

Basically, choosing between the capital market and money market depends on individual investment goals, period, and risk tolerance. By knowing these differences, investors can make right decisions with their financial objectives.

Faisal “Everybody is a genius. But if you judge a fish by its ability to climb a tree, it will live its whole life believing that it is stupid.” — Albert Einstein

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