What Is Capital Market And How Is It Different From Money Market

Capital Market

It is the market where long-term funds such as securities issues of government and business are traded between demanders and suppliers through securities exchanges.         The main securities traded are bonds and stocks. Bonds are long-term debt securities issued to raise funds across various sections of investors. Stocks include both common stocks and preferred stocks offered as equity or ownership rights.

Bonds issued by businesses known as corporate bonds follow a semi-annual mode of interest payment to the investors at a predefined coupon interest rate.

When an investor purchases a common stock, he gets an equal unit of ownership in the company. The stockholders get their returns from the company or corporation in the form of dividends as per the dividend policy of the issuer. The key is that the share price should increase and thereby the cash flow.

Preferred stocks get priority in the payments over common stocks and the stakeholders of preferred stocks get dividend periodically prior to the common stockholders.

Bonds are issued for a large span of time, for example, 20 or 30 years and have a face value at the time of initial maturity.

Both are markets and both of them deal with money. Then, how are they different? Money Market and Capital Market are different in terms of the type of money involved, the purpose of money-handling, the securities rotating, mode of operation and the duration.


Vs Money Market

The money under limelight here are the funds operated through short-term financing. These include bank loans, debt finances, commercial papers, US treasury bills, certificates of deposits etc. Unlike capital market, the debt securities in money market have a maturity period of one year or lesser and are offered by a lot of variety of businesses, governments, agencies, financial institutions, individuals etc.

While traders use capital market for long-term funding, they enter money market to make some quick money or temporary funding as well as to extract some interest or earnings on currently idle funds. These debt-funding instruments do not give any ownership rights to the buyer.

The operation of the money market is carried out either through stock brokerage firms or directly between sellers and purchasers in rapid transactions. Since the rotation rate is faster than the capital market, it is easier to identify any frauds like Crypto Code scam, whereas the long maturity years of capital market securities do not show this trend.

Both the markets allow securities to be resold before the maturity period, with different terms and conditions and value change.


Comments are closed.