Differentiating Money Market vs Share Market: A financial market is where buyers and sellers gather to trade in financial assets. These assets include bonds, stocks, derivatives, currencies, and commodities. The primary objectives of a financial market are to fix prices for trade in global markets, increase capital and transfer risk and liquidity.
Even though the financial market has various components, the 2 most important components are the money market and share/capital market. The money market is the market where only short-term liquid financial instruments get exchanged.
On the other hand, the capital market (share market) is the market where the dealings are done involving long-term securities. To put things into perspective, the money market is used for short-term lending or borrowing.
In this market, the assets are usually held for one year or less. In the share market, securities can be held for the long-term (i.e., over one year).
The latter market acts as the backbone of the growth of a country’s economy. This is because the share market offers a platform for fund mobilization. However, the money market has a range of operational characteristics too.
In this article, we will explain the difference between Money Market vs Share Market as individuals tend to get confused between these two markets.
Money market – What is it?
The money market involves financial institutions, bill brokers, money dealers, banks, etc., and they are involved in dealing with short-term financial tools. At times, these markets are called wholesale markets. In India, this market serves a primary objective of offering liquid cash to borrowers and fund providers.
The amount is offered for a short period of time. Balance is kept between the supply and demand of short-term funds. Some important money market instruments include call money, commercial papers, CDs (certificates of deposits), T-bills (treasury bills), and forward rate agreements.
- Call money- It exhibits short-term loans having maturities from 1 day to 14 days. It is a financial loan that is to be paid on the demand of the lender. Call money does not require the lender to provide any advanced notice of repayment.
- Treasury bill- It is a short-term debt instrument which is issued by the Government of India. These are issued for the duration of 91 days, 182 days, and 364 days. This bill provides no interest to the holder. But they will be issued at a discount and can be redeemed at face value during their maturity.
- Commercial paper (CP)- This is an unsecured money market instrument that gets issued in the form of a promissory note. These money market instruments span a period of one year. This was introduced to help highly-rated corporate borrowers diversify their sources of short-term borrowings.
- Certificate of deposits (CDs)- This is a savings product, earning interest on a lump sum basis for a fixed time duration. As an incentive for lost liquidity, these instruments carry higher interest rates in comparison to savings accounts.
Since this market is disorganized, the dealing takes place off the public exchange market i.e., without the supervision of exchange, and is dealt over the Counter (OTC). These dealings involve two bodies and they use email, fax, online and phones, etc. for the execution.
This market helps industries accomplish their working capital needs as it circulates short-term funds in the economy. Even though money markets are informal, they are highly liquid. Financial instruments in the money market have a maturity period of up to 1 year. Therefore, these markets carry lower risk in comparison to the share market.
An individual can invest in the money market through a purchase of a money market mutual fund, buying a Treasury bill, or opening a money market account at a bank. Money market accounts provide higher interest rates in comparison to a normal savings account. However, they have higher account minimums and withdrawal limits.
In the wholesale market, commercial paper is generally preferred and is considered a popular borrowing mechanism. This is because these have higher interest rates in comparison to bank time deposits or T-bills. Apart from this feature, they also have a greater range of maturities, from overnight to 270 days. On the negative side, they have a higher risk of default than banks or government instruments.
Overview of share market (Money Market vs Share Market)
The share market is a kind of financial market in which the company or government securities are generated and patronized. The sole intention here is to establish long-term finance. This market also helps the companies to get the capital necessary for their operations or capital expenditures.
In this market, the funds are used for long-term investment by the companies. Coming to the nature of the share markets, these markets are risky and highly volatile. Thus, the share market is not considered for short-term funds investment.
The share market involves investors such as stockbrokers, insurance companies, commercial banks, underwriters, etc. This market helps in serving the purpose of achieving long-term credit requirements of the trade.
In comparison to the money market, this market has a higher return on investment as they are made for the long term. As opposed to the money market, the share market is highly regulated and is controlled by rules and regulations set by government/regulatory bodies.
Stock, commonly known as equity, means a security that exhibits the fractional ownership of the company issuing it. Units of stock are known as shares, entitling the owner to a portion of the company’s assets and profits. Stocks can be bought or sold on exchanges and they are the foundation of individual investors’ portfolios.
Since the share market is regulated, the trades which are executed have to conform to government regulations. These regulations are meant to protect investors from fraudulent practices.
Several companies issue stocks to meet their funding requirements and to operate their businesses. In return, the holder of the share, a shareholder, has a claim to part of the issuing company’s assets and earnings. In short, a shareholder is considered an owner of the issuing company, represented by the number of shares that the shareholder owns relative to the outstanding shares.
Both the markets, the money market, and the share market, form part of the financial markets. The financial market focuses on mobilizing funds and generating returns. The financial markets help in stabilizing the money supply. This is done by a lending-borrowing mechanism. This means that surplus funds are offered to borrowers by lenders.
Both markets are required for the economy’s betterment as they help in fulfilling the business and industry’s capital needs. These markets encourage individuals to gain good returns.
Investors can enter either of the markets depending on their needs. Investors have to understand the trade-off between risk and return. Share markets have a higher risk, but they provide good returns. Money markets are highly liquid, but they give lower returns. Most of the time, securities in the money market are considered safe assets.
So, that’s pretty much it on “Money Market vs Share Market”. We hope you enjoyed reading the article. Happy Investing!
Tags: Difference Between money market and share market, Importance of money market, Money Market, Money market Examples, money market vs share market, Money Market vs Stock Market, Overview of share market, Share Market, Structure of money market, What is an example of money market?, What is the Money Market?, Which is better money market or stock market?