The financial market is vast, complex, and often confusing. With more profound research and technological advancements, there are several aspects to understand… which can be hard to catch up.
Let me ease it down for you.
Segmenting the market and studying it part by part is much easier.
So, let’s get to it!
The financial market makes up all trade in various financial instruments. We can divide it into two legs – the money market and the capital market.
What are they and how are they different?
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This market deals in short-term transactions. The lending and borrowing are for short-term purposes. This is an unorganized market where institutions, like banks and governments, which require a good amount of cash daily are found.
What exactly is short-term for the money market?
The duration of the term - short or long - usually differs. In the money market, the short-term could be as short as an overnight borrowing, but not longer than a year.
This is excellent for investments for shorter periods. Let’s say you have some spare money, but it wouldn’t make sense to invest for the long-term because you know you’d need it in a few months. So, the money market is where you go.
Organizations looking for working capital finances, and daily operational needs, turn to this market. So, fulfilling these needs and repaying the finances is quick and easy.
The money market joins the demand and supply for short-term finances. It helps maintain liquidity for its participants.
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The capital market is meant for transactions in long-term borrowing or investments, like shares, bonds, etc.
Corporates, banks, and financial institutions depend on finances from these instruments for long-term uses, like expansion and development. This market is also considered a wealth accumulator by investors.
The duration for investments in the capital market can span up to the maturity of the instrument or even as long as the lifetime of the borrower organization.
The capital market is further categorized as the primary and the secondary market.
The primary market connects companies directly with their investors. This is where any company’s shares are first listed. Post this, once the trader trades in them, they become a part of the secondary market.
The secondary market is where securities that are already listed are traded in the market.
Since the capital market involves sizeable sums of money, it requires regulations by certain governing bodies.
The mobility of finances in this market is taken care of by the stock exchanges, banks, brokers, other corporates, and financial organizations.
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There are various factors distinguishing them, like the instruments dealt in each market, who participates in the market, the risk involved, and more.
People generally deal in forex, promissory notes, treasury bills, commercial papers, and more in money markets. These instruments provide a very safe and fair return for varied durations, spanning from 30 to 90 days or even daily.
The capital market deals in equity and debt, with instruments like equity/preference shares, debentures, bonds, and more. These instruments can be traded daily or kept with the investor for a lifetime.
In money markets, you will find more financial institutions, banks, central banks, chit funds, and a few individuals.
Brokers, mutual funds, underwriters, corporates, and more individuals are seen in the capital market.
Money markets have relatively low regulations to follow across the globe. Only the central bank may supervise, but nothing is structured.
Capital markets, on the other hand, are heavily regulated because they involve large transactions. SEBI and other similar regulatory bodies govern and formalize the structure and process of a capital market.
Money markets have short-term benefits, which means the investments here are highly liquid. You can redeem your investments overnight.
In capital markets, following the process is important. Moreover, the daily volume of transactions fluctuates, making it less liquid. One needs a minimum of 3 days to liquidate capital market investments.
When investments are more liquid and provide short-term and safe returns, there is hardly any risk involved.
But when it comes to long-term finances, it requires a lot of time and involves high risk. This kind of financing shapes the path of organizations in the future.
Now comes the most important question –
The answer to this depends on your goals and the timeline needed to achieve them.
For a young adult who has just started investing, the capital market would be ideal to build wealth for the future.
But for an older person, say a middle-aged person or a senior citizen, liquidity and less volatility are important. Here, the money market would be the better option. Go for this only if you don’t have a big risk appetite.
Yes, there are bigger hiccups in the capital market, but if you stay patient, you can get better returns in capital markets than in money markets.