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Difference in Money Market & Capital Market

Mahaveer (Student (CS Professional)) (48 Points)

24 March 2009

What is difference between 'Capital Market' & 'Money Market'

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Sumit Jain (CA) (4760 Points)
Replied 25 March 2009

The money market consists of financial institutions and dealers in money or credit who wish to either borrow or lend. Participants borrow and lend for short periods of time, typically up to thirteen months. Money market trades in short-term financial instruments commonly called "paper." This contrasts with the capital market for longer-term funding, which is supplied by bonds and equity.

The core of the money market consists of banks borrowing and lending to each other, using commercial paper, repurchase agreements and similar instruments. These instruments are often benchmarked (to i.e. priced by reference to) the London Interbank Offered Rate (LIBOR) for the appropriate term and currency.

Finance companies, such as GMAC, typically fund themselves by issuing large amounts of asset-backed commercial paper (ABCP) which is secured by the pledge of eligible assets into an ABCP conduit. Examples of eligible assets include auto loans, credit card receivables, residential/commercial mortgage loans, mortgage-backed securities and similar financial assets. Certain large corporations with strong credit ratings, such as General Electric, issue commercial paper on their own credit. Other large corporations arrange for banks to issue commercial paper on their behalf via commercial paper lines.

In the United States, federal, state and local governments all issue paper to meet funding needs. States and local governments issue municipal paper, while the US Treasury issues Treasury bills to fund the US public debt.

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Sumit Jain (CA) (4760 Points)
Replied 25 March 2009

The capital market is the market for securities, where companies and governments can raise longterm funds. It is a market in which money is lent for periods longer than a year. ^[1] The capital market includes the stock market and the bond market. Financial regulators, such as the U.S. Securities and Exchange Commission (SEC), oversee the capital markets in their designated countries to ensure that investors are protected against fraud.

The capital markets consist of the primary market and the secondary market. The primary markets are where new stock and bonds issues are sold (underwriting) to investors. The secondary markets are where existing securities are sold and bought from one investor or speculator to another, usually on an exchange (e.g. the New York Stock Exchange).