How Can We Distinguish Between Money Markets & Capital Markets?

by Josienita Borlongan, Demand Media
    Choose between money and capital markets to grow your nest egg.

    Choose between money and capital markets to grow your nest egg.

    Financial investments happen through short-term cash equivalents or long-term stocks and bond certificates. In most cases, individuals and corporate investors seek assistance from financial firms and specialists to guide them in choosing the right kind of financial investment to undertake. Before seeking professional financial advice, take the time to scrutinize how money and capital markets function and how they would best serve your needs to give you a sound and worry-free investment plan.

    Definitions

    Money market thrives on borrowed securities issued by governments, private financial organizations and multinational financial companies. Short-term money market instruments or cash investments are relatively safe, but only earn lower returns as compared to long-term financial investments. On the other hand, capital market is the mother umbrella that you can secure and trade investment portfolios. One segment of this portfolio is the money market. Capital market is where you can trade stocks and bonds. It also offers the means for investors with excess funds to channel their investments to business entities with fund deficits.

    Know the Investment Instruments Used

    Federal funds, certificates of deposit, repurchase contracts and treasury bills are some of the common money market instruments. Money market serves as a trading arena for short-term and low-risk securities in cash equivalents bought and sold by private and government institutions to provide temporary investment houses for excess funds.

    For capital markets, you trade investments by means of equity, credit, insurance, foreign exchange and other financial instruments derived from existing financial portfolios. Investments occur in the bond market as debt securities and at the stock market through company stocks and other securities exchange.

    Compare Advantages

    Money market offers fast, unregulated and secured returns on investment. It may offer moderate investment rates, but it ties your cash assets temporarily to secured and low-risk investments. It is a less expensive way of acquiring cash assets to answer for short-term liabilities. With money market, you can make and seal the deal over the phone or through electronic commerce.

    For capital markets, trading systems are decentralized, enabling investors the freedom and flexible mobility. With capital markets, you can easily access comparative earnings analyses using bond equivalent yields. Capital market investments also infuse needed funds from strong economies to revive failing ones.

    Compare Disadvantages

    Money markets have lower investment rates and, compared to capital markets, the yields are relatively lower. In capital markets, the yields are high, but so are the risks. Long-term financial instruments can suffer from varying and fluctuating stock prices and bond interest rates. When stock market crashes, it produces a domino effect that cascades from the economy to the family household and to the individual consumer. Changes in national monetary policies can have a huge effect on bond interest rates and prices.

    About the Author

    Josienita Borlongan is a full-time lead web systems engineer and a writer. She writes for Business.com, OnTarget.com and various other websites. She is a Microsoft-certified systems engineer and a Cisco-certified network associate. She graduated with a Bachelor of Science in medical technology from Saint Louis University, Philippines.

    Photo Credits

    • business charts with us money image by Andrew Brown from Fotolia.com