Comparing Different Financial Systems
February 12, 2025
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Financial markets are markets where financial instruments or securities are traded. Financial markets can be classified based on various parameters. In order to understand the types of financial markets, we need to first understand the broad categories in which it is subdivided.
The broadest classification divides financial markets into two types’ viz. money markets and capital markets. In this article, we will understand what money markets and capital markets are and the difference between the two.
The difference between money markets and capital markets is actually quite simple. Money markets transact in financial securities that have a maturity of less than one year. Commercial paper, short term treasury notes, promissory notes, and bills of exchange are commonly traded on the money market. Therefore, it can be said that money markets are used by firms who are looking to borrow money for a very short period of time.
On the other hand, securities sold on the capital markets have maturities that are at least longer than a year. Most financial instruments sold on these markets have extremely long term maturities i.e., a decade or more. Also, a lot of equity stock is sold in the capital market, and equities do not have any definite maturity! Preferred stock, common stock, bonds, gilts, and debentures are the financial instruments that are commonly transacted in the capital market. All stocks and bonds which retail investors commonly buy are said to be a part of the capital markets. Therefore, it would be fair to say that companies use the capital market when they want to raise money for the long term.
The bottom line is that capital markets and money markets both serve different but complementary needs. Hence, both thee markets complete the financial system of any country.
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