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Discover the differences between the money markets and capital markets. Understand the risk-return dynamics between them. Explore short-term money market instruments like Treasury bills and commercial papers and long-term options such as bonds, debentures, and stocks in the capital market.

Exploring Money Market vs Capital Market: Instruments, Risks, Returns

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"Exploring Money Market vs Capital Market: Instruments, Risks, Returns"

Anoop Menon

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<p id="">While the <a target="_blank" rel="noopener noreferrer" href="https://fi.money/blog/posts/what-are-money-market-funds-and-how-to-invest-them">money market </a>deals with short-term investments, the capital market focuses on long-term commitments. In this article, we'll explore the differences between these markets, their fundamental characteristics, and the various instruments they offer. From treasury bills and commercial papers to bonds, debentures, and stocks, we'll delve into the unique features and risk-return profiles of each. Additionally, we'll discuss how mutual funds can provide a convenient way to invest in both markets.</p><h2 id="">Money Market: Definition &amp; Types</h2><p id="">A market for short-term financial assets known as <a target="_blank" rel="noopener noreferrer" href="https://fi.money/blog/posts/https-fi-money-blog-posts-money-market-funds-meaning-benefits-features">money market </a>instruments. These instruments, including bonds, have maturities ranging from overnight to one year and aim to provide liquidity for day-to-day business operations. In India, some types of money market instruments include:</p><p id="">* <strong id="">Treasury Bills: </strong>Issued by the government with a maturity of up to 365 days are considered safe investments.&nbsp;<br>* <strong id="">Certificates of Deposit: </strong>Savings products commercial banks offer with higher interest rates than fixed deposits but no option for premature redemption.&nbsp;<br>* <strong id="">Repurchase Agreements: </strong>Involves short-term financing where banks sell government securities for immediate cash and agree to repurchase them at a higher price the next day.&nbsp;<br>‍ <strong id="">* Commercial Papers: </strong>Unsecured promissory notes issued by highly rated companies and financial institutions, allowing them to borrow from diverse sources. They are typically issued at a discount but redeemed at face value, providing investors with returns based on the difference and limited risk until maturity.</p><h2 id="">What’s a Capital Market?</h2><p id="">Capital markets make investments for long-term strategic business objectives, such as expansion or establishing new facilities. Although they carry higher risks, they offer the potential for higher returns. Some instruments in the capital markets include:</p><p id="">* <strong id="">Bonds with tenures over a year: </strong>Companies and governments issue longer-term bonds, which form a part of the capital markets. These bonds provide a fixed income over a specified period.&nbsp;<br>* <strong id="">Debentures: </strong>Debentures are unsecured debt instruments similar to bonds but with higher risk. They have shorter tenures and offer higher interest rates. Debenture holders have priority over shareholders for interest or dividend payments.&nbsp;<br>* <strong id="">Stocks: </strong>Stocks or shares represent equity ownership in a company. Shareholders receive a portion of the company's profits through dividends and can benefit from share price appreciation. However, investing in stocks also involves market-related risks.</p><h2 id="">Differences Between Money Markets and Capital Markets</h2><p id=""><strong id="">Money market&nbsp;</strong></p><p id="">*Short-term debt instruments&nbsp;<br>*Maturities range from overnight to 1 year&nbsp;<br>*Instruments are issued to finance a company's short-term, operational and tactical initiatives&nbsp;<br>*Provides lower returns compared to Capital Markets&nbsp;<br>*They have relatively lesser risk factors</p><p id=""><strong id="">Capital market&nbsp;</strong></p><p id="">*It's all about obtaining financing for a company's long-term <a target="_blank" rel="noopener noreferrer" href="https://fi.money/blog/posts/how-to-understand-that-which-is-the-best-company-for-investment-in-share-marke" id="">strategic initiatives&nbsp;</a><br><a target="_blank" rel="noopener noreferrer" href="https://fi.money/blog/posts/how-to-understand-that-which-is-the-best-company-for-investment-in-share-marke" id="">‍ </a>*Relatively riskier than money market instruments&nbsp;<br>*Issued for longer terms&nbsp;<br>*The potential returns are higher than on money market instruments over the long term</p><h2 id="">Conclusion</h2><p id="">Understanding the distinctions between money and capital markets is crucial for making informed investment decisions. The money market offers short-term liquidity with instruments like Treasury bills, certificates of deposit, repurchase agreements, and commercial papers. On the other hand, the capital market provides long-term investment avenues through bonds, debentures, and stocks. Consider mutual funds a convenient option to access both markets and diversify your investment portfolio effectively.</p><h2>Explore All Markets and Invest Via Fi</h2><p id="">Fi enables you to invest in top US companies — at industry-best Forex rates. So you can own shares in some of the biggest global brands! With an intuitive user interface, Fi simplifies the world of US Stocks alongside their FINRA-regulated broker partner, Alpaca Securities. Besides in-app explainers, new investors can use Curated Collections to make decisions. Seasoned investors can dive deeper, apply filters &amp; pick from a wide range of international options. What's more, there are zero withdrawal charges for investing in US Stocks through Fi.</p><h2 id="">Frequently Asked Questions</h2><h3 id="">1. What are the types of capital markets?</h3><p id=""><span id=""><strong>‍Primary Market </strong>: New securities are offered to investors for the first time through IPOs or FPOs.&nbsp;</span></p><p id=""><span style="font-size:1em;"><strong>Secondary Market </strong>: Trading of previously issued securities between buyers and sellers on stock exchanges.&nbsp;</span></p><h3 id="">2. Differences between a money market and a capital market?</h3><p id=""><strong>Investment Nature: </strong>Money market for short-term needs, capital market for long-term goals.</p><p id=""><strong>Tenure </strong>: Money market is short-term (overnight to a year), capital market is long-term (over a year).</p><p id=""><strong>Risk and Reward </strong>: Money market is low risk and low return, capital market has higher risk but potential for higher long-term returns.</p><p id=""><br>&nbsp;</p><h3 id="">3. Which country has the best money market?</h3><p id="">There is no such thing as the "best money market". Generally, developed economies like the UK and the US tend to have very mature markets. It is because they were established earlier than those of developing economies. Some examples of instruments in money markets are Treasury Bills, Certificates of Deposits, Repurchase agreements, and Commercial Papers.</p><h3 id="">4. How many instruments are there in the capital market?</h3><p id="">There are three instruments in the capital market: Pure Instruments, Hybrid Instruments, and Derivatives.</p><h3 id="">Want to learn more about the markets? Read on:</h3><ol id=""><li id=""><a target="_blank" rel="noopener noreferrer" href="https://fi.money/blog/posts/what-are-latest-and-safe-share-market-investment-tips" id="">Tips for keeping safe in the share market&nbsp;</a></li><li id=""><a target="_blank" rel="noopener noreferrer" href="https://fi.money/blog/posts/what-is-more-better-for-me-between-mutual-fund-and-stock-market" id="">Share Market vs Mutual Funds&nbsp;</a></li></ol>

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