The capital market and money market make up the financial system which facilitates exchange of funds between financial market participants- the investors, borrowers and lenders. In other words, the financial system is the link between the lenders and borrowers to raise funds whether short term or long term. These markets are not “physical” in nature rather they are transacted over a network of banks and traders.
The table below will help you understand the features of both markets.
|Money Market||Capital Market|
|Trades short term (one day – one year)||Trades long term|
|Ideal for investors with short time-horizon||Ideal for investors with long time-horizon|
|Less risk||More risk|
|Lower but steady returns||Higher returns|
|Securities traded include treasury bills, commercial papers, fixed deposits, banker’s acceptance etc.||Securities traded include bonds (debt securities) and equity (shares/stock which represents ownership in a company)|
|Instruments are very liquid- can be easily converted to cash||Instruments are not as liquid as those in the Money Market|
|Money Market Mutual Funds are funds (which represent a pool from different investors) which are managed by professionals and are invested across different money market instruments. We have naira currency mutual funds as well as mutual funds in foreign currency e.g. Dollar Mutual Funds (which pools dollars from investors and invests in dollar-denominated securities).||Bonds can be issued by government or corporations. |
Euro bonds are international bonds denominated in a currency not native to the country where it is issued.
|They can be traded nationally and globally||They can be traded nationally and globally|
|Securities traded can be accessed via financial institutions.||This market can be further divided into primary market (for initial issue of bonds and equity) and secondary market (for resale of securities by existing holders).|
|Minimum investment amount can range from N100,000 to N1,000,000. However, mutual funds mostly require a minimum of N5,000.||Minimum amount can be relative. You can buy shares or bonds with as low as N10,000.|
I hope this post has been helpful in explaining what the money market and capital market mean and how they may suit your capital size, time horizon and risk appetite.
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