Money Markets vs. Capital Markets: Key Differences (2024)

Money markets and capital markets make the financial world go ’round.

In the money markets, governments, banks, and others buy and sell short-term debt—and individual investors own bank accounts, certificates of deposit (CDs), money market accounts, money market funds, and similar assets. And in the capital markets, investors trade stocks, bonds, and other assets.

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Money market in brief

As the International Monetary Fund explains, money markets enable banks, investors, and others to make short-term, relatively safe investments that provide governments, banks, and others access to short-term, low-cost funds. The money market as a whole “is considered one of the safest corners of the financial universe,” says the Financial Industry Regulatory Authority (FINRA), which oversees U.S. stockbrokers.

Assets that are bought and sold in the money markets include money market mutual funds, bank-to-bank loans, CDs, Treasury bills, and commercial paper (short-term IOU debt issued by financial institutions and big corporations).

When it comes to the money markets, many investors may be quite familiar with money market mutual funds. Someone who invests in a money market mutual fund is buying into a pool of short-term debt assets such as CDs and Treasury bills. Although money market mutual funds aren’t insured by the federal government, they’re viewed as one of the safest investments available.

Capital market in brief

When investors hold assets such as stocks and bonds, whether individually or through a mutual fund or exchange traded fund (ETF), they’re participating in the capital markets.

Familiar venues for trading stocks in the capital markets include the New York Stock Exchange (NYSE) and the Nasdaq Stock Market. Each weekday, investors trade billions of shares of stock of publicly traded companies on the NYSE, the world’s largest stock exchange, and the Nasdaq, which focuses on companies in the tech sector.

Typically, brokerage firms handle stock trades on behalf of institutional and individual investors. Trades normally happen electronically.

Why money markets and capital markets are important to our economy

Money markets and capital markets are important to our economy because they serve as the backbone of the financial system, says Daniel Milan, founder and managing partner of Cornerstone Financial Services in Southfield, Mich.

Money markets account for trillions of dollars in assets. For example, U.S. money market funds—mutual funds that invest in short-term debt—held $5.45 trillion in assets as of the week ending July 12, 2023, the Investment Company Institute reported.

Meanwhile, capital markets in the U.S. finance over 70% of economic activity in the U.S., according to the Securities Industry and Financial Markets Association (SIFMA). These markets “help people with ideas become entrepreneurs and help small businesses grow into big companies. They also give folks … opportunities to save and invest for our futures,” according to the Federal Reserve Bank of St. Louis.

Differences between money markets and capital markets

While money markets and capital markets both involve investing, they’re more different than they are alike.

“They serve different purposes and carry different risk levels. Money markets are typically shorter-term and carry less risk but offer less potential reward. Capital markets are typically longer-term and offer greater risk but potential for greater rewards,” Milan explains.

Money markets vs. capital markets

Here is a side-by-side comparison of money markets and capital markets.

Money marketsCapital markets

Usually shorter-term investments (typically less than one year)

Usually longer-term investments (typically at least one year)

Normally less risk

Normally more risk

Generally lower investment yields

Generally higher investment yields

Less structured

More structured

Easier to convert to cash

Harder to convert to cash

Which is a better investment?

From an investment perspective, neither money markets nor capital markets are better than the other,

Milan says. Whether one type is preferable to the other depends on factors such as your financial goals and tolerance for investment risk.

Alternatives to money markets and capital markets

Money markets and capital markets aren’t only places to invest money. Among the alternatives are:

  • Real estate
  • Collectibles such as artwork, coins, and wine
  • Investments in privately owned companies like tech startups
  • Commodities such as oil, gas, and precious metals

Keep in mind that while alternative investments can diversify your portfolio, they also can come with a high level of risk.

Frequently asked questions (FAQs)

What are three types of capital market?

Among the types of capital market are stock markets, bond markets, and foreign exchange markets.

What are four examples of money market instruments?

Money market instruments include money market accounts, money market funds, CDs, and Treasury bills.

Can money market accounts lose money?

Money market accounts are insured up to $250,000 by either the Federal Deposit Insurance Corp. (FDIC) or National Credit Union Administration (NCUA). Because they’re insured, someone who holds a money market account typically won’t lose money. However, fees, inflation, and other negative factors can eat away at cash kept in a money market account.

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Money Markets vs. Capital Markets: Key Differences (2024)


Money Markets vs. Capital Markets: Key Differences? ›

Money markets are made up of short-term investments carrying less risk, whereas capital markets are more geared toward the longer term and offer greater potential gains and losses.

What is the main difference between money markets and capital markets in Quizlet? ›

Capital markets are markets in which money is lent for periods longer than a year, while money markets are markets in which money is lent for periods of less than a year.

What is the difference between the money market and the bond market? ›

The money market is part of the fixed-income market that specializes in short-term government debt securities that mature in less than one year. Buying a bond is effectively giving the issuer a loan for a set duration; the issuer pays a predetermined interest rate at set intervals until the bond matures.

Are US treasury bills money market or capital market? ›

Money markets include markets for such instruments as bank accounts, including term certificates of deposit; interbank loans (loans between banks); money market mutual funds; commercial paper; Treasury bills; and securities lending and repurchase agreements (repos).

How does the location of money markets differ from that of capital markets? ›

The capital markets are more likely to be characterized by actual physical locations such as the New York Stock Exchange or the American Stock Exchange. Money market transactions are more likely to occur via telephone, wire transfers, and computer trading.

What are the key differences between money market and capital market? ›

The money market fulfils short-term liquidity needs, while the capital market offers a platform for long-term investing. Money market instruments are more liquid than capital market instruments, and the money market is less risky than the capital market.

What are the functions of the money market? ›

Functions of money market include price discovery, liquidity management, trade financing, risk mitigation, supports government funding needs, and central bank operations. The money market is a vital part of the financial world that deals with short-term borrowing, lending, and trading of financial instruments.

Are common stocks money market or capital market? ›

Capital markets are used to sell different financial instruments, including equities and debt securities. These markets are divided into two categories: primary and secondary markets. The best-known capital markets include the stock market and the bond markets.

Are mortgages money market or capital market? ›

Answer and Explanation: Generally, mortgage markets are more secured than other capital markets. The only difference between the mortgage markets and other capital markets is the security of mortgages. In the mortgage market, loans are provided against mortgages by the lenders.

What is money market in simple words? ›

The money market involves the purchase and sale of large volumes of very short-term debt products, such as overnight reserves or commercial paper. An individual may invest in the money market by purchasing a money market mutual fund, buying a Treasury bill, or opening a money market account at a bank.

Are treasury bills traded in capital markets? ›

Assets Traded: The money market trades instruments such as Treasury bills, certificates of deposit, promissory notes, commercial papers and bonds redeemable in less than a year. The capital market trades in most bonds, stocks and other instruments either backed by equity or redeemable in more than one year.

How do capital markets work? ›

Capital markets are financial markets that bring buyers and sellers together to trade stocks, bonds, currencies, and other financial assets. Capital markets include the stock market and the bond market. They help people with ideas become entrepreneurs and help small businesses grow into big companies.

Which of the following is traded on the capital market? ›

Funding instruments traded in the capital markets include debentures, shares, bonds, debt instruments, ETFs, etc. The securities exchanged here are typically long-term investments. The capital market includes the securities market and the bond market.

What is the difference between capital markets and equity capital markets? ›

The equity capital market is a subset of the broader capital market, where financial institutions and companies interact to trade financial instruments and raise capital for companies.

What is the difference between money market and foreign exchange market? ›

Foreign exchange markets allow for the trading of foreign currencies, using instruments such as spot transactions, futures, forwards, and swaps. Money markets link international lenders of short-term funds with borrowers using instruments such as Eurocurrencies and Eurobonds.

What is the difference between money and finance? ›

Money is a part of finance. Finance is a broader concept that includes the management, creation, and study of money. The money includes cash and cash equivalents that are readily available for use. Finance includes personal, public, and corporate finance.

What do you mean by capital markets? ›

Capital markets allow traders to buy and sell stocks and bonds, and enable businesses to raise financial capital to grow. Businesses also have reduced risk and expenses in acquiring financial capital because they have reliable markets where they can obtain funding.


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