The money market is a good place for individuals, banks, other companies, and governments to park cash for a short period of time, usually one year or less. It exists so that businesses and governments that need cash to operate can get it quickly at a reasonable cost, and so that businesses that have more cash than they need can put it to use.
The money market is a component of the economy that provides short-term funds. The money market deals in short-term loans, generally for a period of a year or less.
As short-term securities became a commodity, the money market became a component of the financial market for assets involved in short-term borrowing, lending, buying and selling with original maturities of one year or less. Trading in money markets is done over the counter and is wholesale.
There are several money market instruments in most Western countries, including treasury bills, commercial paper, banker’s acceptances, deposits, certificates of deposit, bills of exchange, repurchase agreements, federal funds, and short-lived mortgage- and asset-backed securities. The instruments bear differing maturities, currencies, credit risks, and structures. A market can be described as a money market if it is composed of highly liquid, short-term assets. Money market funds typically invest in government securities, certificates of deposit, commercial paper of companies, and other highly liquid, low-risk securities. The four most relevant types of money are commodity money, fiat money, fiduciary money (cheques, banknotes), and commercial bank money. Commodity money relies on intrinsically valuable commodities that act as a medium of exchange. Fiat money, on the other hand, gets its value from a government order.
Money markets, which provide liquidity for the global financial system including for capital markets, are part of the broader system of financial markets.
Benefits of the money market:
- The money market contains financial associations and traders in money or credit who desire to borrow or lend. Members borrow and lend for short times, generally up to or less than one year. The money market remains focused on interbank lending in which banks borrow and gives loans to one and another with the help of commercial paper, repurchase agreements, and related tools. Finance companies usually fund themselves by permitting a massive quantity of asset-backed commercial paper (ABCP), protected by the pledge of suitable assets, into an ABCP instrument.
- Money market investors usually invest in administration securities, certificates of deposit, commercial papers of corporations, and other less-risky securities.
- The money market has a fundamental role in financing local and international trade. The money market allows commercial banks to use their additional funds in gainful investments. The primary purpose of commercial banks is to make income from their funds and keep liquidity to gather the unsure cash order of its depositors. When an emergency occurs commercial banks can fulfill their necessities by using their previous short-run loans from the money market.
- Although the central bank can work and persuade the banking system in the lack of a money market, the survival of a developed money market smoothes the functioning and strengthen the central bank’s capability.
A capital market is a financial market in which long-term debt (over a year) or equity-backed securities are bought and sold, in contrast to a money market where short-term debt is bought and sold. Capital markets channel the wealth of savers to those who can put it to long-term productive use, such as companies or governments making long-term investments.[a] Financial regulators like Securities and Exchange Board of India (SEBI), Bank of England (BoE) and the U.S. Securities and Exchange Commission (SEC) oversee capital markets to protect investors against fraud, among other duties.
Transactions on capital markets are generally managed by entities within the financial sector or the treasury departments of governments and corporations, but some can be accessed directly by the public. As an example, in the United States, any American citizen with an internet connection can create an account with Treasury Direct and use it to buy bonds in the primary market, though sales to individuals form only a tiny fraction of the total volume of bonds sold. Various private companies provide browser-based platforms that allow individuals to buy shares and sometimes even bonds in the secondary markets. There are many thousands of such systems, most serving only small parts of the overall capital markets. Entities hosting the systems include stock exchanges, investment banks, and government departments. Physically, the systems are hosted all over the world, though they tend to be concentrated in financial centres like London, New York, and Hong Kong.
Types of capital market
Primary market: A primary market is a place where dealers trade with new securities or share. In this market, the company takes cash from an investor or buyer and offer new securities or any other instrument in exchange.
Secondary market: Secondary market deals with formerly issued or existing shares. Every security can be sold on the primary market only once but can be resold again in the secondary market. Although, Dealings on the secondary market do not openly support finance. Still, they make it easier for companies and governments to withdraw money from the primary market, as shareholders know that if they wish to get their money back fast, they will generally be easily capable of re-selling their securities. There is no limit to how many times a security can be sold in the secondary market. Also, the secondary market divides the security on the basis of what nature they are, for example, it belongs to the stock market or bond market.
It is the part of financial market where lending and borrowing takes place for short-term up to one year
Capital market is part of the financial market where lending and borrowing takes place for the medium-term and long-term
|Types of instruments involved||Money markets generally deal in promissory notes, bills of exchange, commercial paper, T bills, call money, etc.||Capital market deals in equity shares, debentures, bonds, preference shares, etc.|
|Institutions involved/types of investors||The money market contains financial banks, the central bank, commercial banks, financial companies, chit funds, etc.||It involves stockbrokers, mutual funds, underwriters, individual investors, commercial banks, stock exchanges, Insurance Companies|
|Nature of Market||Money markets are informal||Capital markets are more formal|
|Liquidity of the market||Money markets are liquid||Capital Markets are comparatively less liquid|
|Risk factor||Since the market is liquid and the maturity is less than one year, Risk involved is low||Due to less liquid nature and long maturity, the risk is comparatively high|
|Functional merit||The money markets increase the liquidity of funds in the economy||The capital market stabilizes the economy due to long-term savings|
|Return on investment||The return in money markets are usually low||The returns in capital markets are high because of higher duration|
|Purpose||The market fulfills the short-term credit needs of the business||The capital market fulfills the long-term credit needs of the business|
|Maturity period||The maturity of financial instruments is generally up to 1 year||The maturity of capital markets instruments is longer and they do not have stipulated time frame|
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