Financial markets: Capital vs. Money Markets
A financial market brings buyers and sellers together to trade in financial assets such as stocks, bonds, commodities, derivatives and currencies. The purpose of a financial market is to set prices for global trade, raise capital, and transfer liquidity and risk. Although there are many components to a financial market, two of the most commonly used are money markets and capital markets.
Money markets are used by government and corporate entities as a means for borrowing and lending in the short term, usually for assets being held for up to a year. Conversely, capital markets are more frequently used for long-term assets, which are those with maturities of greater than one year.
Capital markets include the equity (stock) market and debt (bond) market. Together, money markets and capital markets comprise a large portion of the financial market and are often used together to manage liquidity and risks for companies, governments and individuals.
Capital markets are perhaps the most widely followed markets. Both the stock and bond markets are closely followed, and their daily movements are analysed as proxies for the general economic condition of the world markets. As a result, the institutions operating in capital markets – stock exchanges, commercial banks and all types of corporations, including non-bank institutions such as insurance companies and mortgage banks – are carefully scrutinized.
The institutions operating in the capital markets access them to raise capital for long-term purposes, such as for a merger or acquisition, to expand a line of business or enter a new business, or for other capital projects. Entities that are raising money for these long-term purposes come to one or more capital markets. In the bond market, companies may issue debt in the form of corporate bonds, while both local and federal governments may issue debt in the form of government bonds.
Similarly, companies may decide to raise money by issuing equity on the stock market. Government entities are typically not publicly held and, therefore, do not usually issue equity. Companies and government entities that issue equity or debt are considered the sellers in these markets. (See also: What Are the Differences Between Debt and Equity Markets?)
The buyers (or the investors) buy the stocks or bonds of the sellers and trade them. If the seller (or issuer) is placing the securities on the market for the first time, then the market is known as the primary market.
Conversely, if the securities have already been issued and are now being traded among buyers, this is done on the secondary market. Sellers make money off the sale in the primary market, not in the secondary market, although they do have a stake in the outcome (pricing) of their securities in the secondary market.
The buyers of securities in the capital market tend to use funds that are targeted for longer-term investment. Capital markets are risky...