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Money markets and capital markets make the financial world go ’round.
In the money markets, governments, banks, and others buy and sell short-term debt—and individual investors own bank accounts, certificates of deposit (CDs), money market accounts, money market funds, and similar assets. And in the capital markets, investors trade stocks, bonds, and other assets.
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Money market in brief
As the International Monetary Fund explains, money markets enable banks, investors, and others to make short-term, relatively safe investments that provide governments, banks, and others access to short-term, low-cost funds. The money market as a whole “is considered one of the safest corners of the financial universe,” says the Financial Industry Regulatory Authority (FINRA), which oversees U.S. stockbrokers.
Assets that are bought and sold in the money markets include money market mutual funds, bank-to-bank loans, CDs, Treasury bills, and commercial paper (short-term IOU debt issued by financial institutions and big corporations).
When it comes to the money markets, many investors may be quite familiar with money market mutual funds. Someone who invests in a money market mutual fund is buying into a pool of short-term debt assets such as CDs and Treasury bills. Although money market mutual funds aren’t insured by the federal government, they’re viewed as one of the safest investments available.
Capital market in brief
When investors hold assets such as stocks and bonds, whether individually or through a mutual fund or exchange traded fund (ETF), they’re participating in the capital markets.
Familiar venues for trading stocks in the capital markets include the New York Stock Exchange (NYSE) and the Nasdaq Stock Market. Each weekday, investors trade billions of shares of stock of publicly traded companies on the NYSE, the world’s largest stock exchange, and the Nasdaq, which focuses on companies in the tech sector.
Typically, brokerage firms handle stock trades on behalf of institutional and individual investors. Trades normally happen electronically.
Why money markets and capital markets are important to our economy
Money markets and capital markets are important to our economy because they serve as the backbone of the financial system, says Daniel Milan, founder and managing partner of Cornerstone Financial Services in Southfield, Mich.
Money markets account for trillions of dollars in assets. For example, U.S. money market funds—mutual funds that invest in short-term debt—held $5.45 trillion in assets as of the week ending July 12, 2023, the Investment Company Institute reported.
Meanwhile, capital markets in the U.S. finance over 70% of economic activity in the U.S., according to the Securities Industry and Financial Markets Association (SIFMA). These markets “help people with ideas become entrepreneurs and help small businesses grow into big companies. They also give folks … opportunities to save and invest for our futures,” according to the Federal Reserve Bank of St. Louis.
Differences between money markets and capital markets
While money markets and capital markets both involve investing, they’re more different than they are alike.
“They serve different purposes and carry different risk levels. Money markets are typically shorter-term and carry less risk but offer less potential reward. Capital markets are typically longer-term and offer greater risk but potential for greater rewards,” Milan explains.
Money markets vs. capital markets
Here is a side-by-side comparison of money markets and capital markets.
|Money markets||Capital markets|
Usually shorter-term investments (typically less than one year)
Usually longer-term investments (typically at least one year)
Normally less risk
Normally more risk
Generally lower investment yields
Generally higher investment yields
Easier to convert to cash
Harder to convert to cash
Which is a better investment?
From an investment perspective, neither money markets nor capital markets are better than the other,
Milan says. Whether one type is preferable to the other depends on factors such as your financial goals and tolerance for investment risk.
Alternatives to money markets and capital markets
Money markets and capital markets aren’t only places to invest money. Among the alternatives are:
- Real estate
- Collectibles such as artwork, coins, and wine
- Investments in privately owned companies like tech startups
- Commodities such as oil, gas, and precious metals
Keep in mind that while alternative investments can diversify your portfolio, they also can come with a high level of risk.
Frequently asked questions (FAQs)
What are three types of capital market?
Among the types of capital market are stock markets, bond markets, and foreign exchange markets.
What are four examples of money market instruments?
Money market instruments include money market accounts, money market funds, CDs, and Treasury bills.
Can money market accounts lose money?
Money market accounts are insured up to $250,000 by either the Federal Deposit Insurance Corp. (FDIC) or National Credit Union Administration (NCUA). Because they’re insured, someone who holds a money market account typically won’t lose money. However, fees, inflation, and other negative factors can eat away at cash kept in a money market account.
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