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Money Market vs Capital Market

What is a Money Market

A Money Market is marketplace investors to trade short term debts. Whether these debts are owned by companies, corporations, banks, or individuals they are traded in a money market. Types of debts exchanged in a Money Market all have a maturity of 1 year or less. Meaning that the principal investment of the instrument may be collected back in less than 12 months. Usually these debts are bought and sold in large volumes by banks which wish to take on the risk as well as collect interest payments. Many mutual funds engage in the investment of money markets, thus giving investors some reward for lending their capital to these debt seekers. Money Markets also play a role in short term municipal notes, certificates of deposit and even in some treasury bonds. Investing in a money market fund can lead to a higher than average APY but that also comes with slightly increased risk. Some commercial banks will borrow money from another commercial bank and return the full amount overnight if the bank is running low on cash reserve in a specific location.

What is a Capital Market

A Capital Market is a marketplace for long term debts usually over a year left until the end of the debt. These are normally issued in the form of bonds or even shares from publicly traded companies. Instruments that are used in Capital Markets can be broken up into 2 categories: Debt Capital and Equity Capital.

Debt Capital

Debt Capital is issued by a company if they decide that they need capital to keep the company operating at maximum profit. They will do this in the form of bonds, they will create and issue bonds to wealthy investors or to investment funds instead of applying for a high interest cash loan from a bank. This allows the company to raise the necessary funds to continue their ongoing operations and slowly pay back interest on the bonds. These types of bonds can have a maturity rate anywhere from over 1 year to up to 30 years long. When a bond reaches maturity it may be cashed in by the investor to receive the initial investment back (not to mention all the interest already collected by the investor during the period they owned the bond).

Equity Capital

Equity Capital is needed by a company when they don't wish to take on any cash debt obligations and do not wish to have a large payment either each month or at the maturity of a bond. The prime example of Equity Capital is shares of a company in the stock market. A company may wish to raise capital by selling off some of the shares that they still own after the IPO (initial public offering) to fund operations they deem necessary. This prevents the company from facing new loan obligations such as interest payments and principal payback, it also offers investors more of a chance to invest in the company as more shares are made available on the stock exchange.

Loan Syndication

Often times debts created either in the Capital Market or the Money Market are purchased by banks or a group of banks called a syndicate. The process of purchasing the loan via a group of banks is called loan syndication. This often occurs when the loan amount requested by the company or borrower is more than any one single investor can reasonably fund. So a collection of commercial banks decide they want to invest in the company and fund the loan amount and this way the risk is spread over the group of banks and not all just on one bank. This helps hedge the risk from the investment in the case that the borrower fails to pay the loan amount back by the time specified and it increases the chances that the borrower gets a funded loan because now an entity large enough exists to supply the borrower with the capital they desire. This system of group investing may also be referred to as a participation loan. They key differences between a participation loan and a syndication is that in a participation loan one of the many banks involved will assume the lead role and be responsible for the communication to the borrower and collection of payments and from there the lead bank will distribute the payment from the borrower to the other participating banks. This differs from a syndication because in a loan syndication all the banks are treated as equal partners and the borrower is in contact with all of them and makes payments to all of them as well and no one bank assumes the lead over the others.

Conclusion:

Money Markets Capital Markets
Short term debts Long term debts
Equity is not traded Equity is traded
Loans, Bonds Loans, Bonds, Shares