While the money market 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.
A market for short-term financial assets known as money market 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:
* Treasury Bills: Issued by the government with a maturity of up to 365 days are considered safe investments.
* Certificates of Deposit: Savings products commercial banks offer with higher interest rates than fixed deposits but no option for premature redemption.
* Repurchase Agreements: Involves short-term financing where banks sell government securities for immediate cash and agree to repurchase them at a higher price the next day.
* Commercial Papers: 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.
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:
*Bonds with tenures over a year: 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.
*Debentures: 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.
*Stocks: 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.
Money market
*Short-term debt instruments
*Maturities range from overnight to 1 year
*Instruments are issued to finance a company's short-term, operational and tactical initiatives
*Provides lower returns compared to Capital Markets
*They have relatively lesser risk factors
Capital market
*It's all about obtaining financing for a company's long-term strategic initiatives
*Relatively riskier than money market instruments
*Issued for longer terms
*The potential returns are higher than on money market instruments over the long term
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.
Primary market
Here listed securities are made available to retail/institutional investors for the first time. In the primary market, securities are issued via either the Initial Public Offer (IPO) or Follow-on Public Offer (FPO) routes.
Secondary market
Here the securities got issued in the primary market to initial investors. So, the trades are between the buyer and the seller of these securities on the stock exchanges.
Investment Nature: Money market investments fund short-term operational and tactical initiatives, such as timely salary payments and vendor transactions. Capital market investments, on the other hand, support long-term strategic endeavours like constructing new facilities or establishing supply chains.
Tenure: Money market instruments have short tenures, spanning from overnight to a year. In contrast, capital market instruments typically have longer durations, exceeding one year.
Risk and Reward: Money market instruments involve lower risk but also offer lower returns. Capital market instruments, while carrying somewhat higher risk, have the potential for relatively higher long-term returns.
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.
There are three instruments in the capital market: Pure Instruments, Hybrid Instruments, and Derivatives.
