Quote ARN -99994 for all Equity/Debt and ELLS mutual funds
EUIN - E120123
Money Market vs Stock Market
EUIN - E120123
Money Market vs Stock Market
An investor
has always confusion regarding where to investment in Stock
market or Money market
There are two types of financial markets viz. the
money market and the capital market. The money market in that part of a
financial market which deals in the borrowing and lending of short term loans
generally for a period of less than or equal to 365 days. It is a mechanism to
clear short term monetary transactions in an economy.
.
what
is stock market…?
Most of the reader or investor must me very well known
with the term “stock market” and so we not discussing much of it and so just
sharing a small introduction.
The market in which shares are issued and traded
either through exchanges or over-the-counter markets. Also known as the equity
market, it is one of the most vital areas of a market economy as it provides
companies with access to capital and investors with a slice of ownership in the
company and the potential of gains based on the company’s future
performance.
;
What is money market?
The most of the investor is not aware of this market
and fact regarding the same. you as a investor think are you aware of what is
money market it advantage or more basic thing which instruments can be included
in this category today in this article i am going to share very basic
thing of money market even we will compare the both financial market.
A segment of the financial market in which financial
instruments with high liquidity and very short maturities are traded. The money
market is used by participants as a means for borrowing and lending in the
short term, from several days to just under a year. It is part of debt market.
Money market instruments
.
Short lsit of important money market instruments to
make you aware
§ Money Market Instruments
§ Treasury Bills (T-Bills)
§ Commercial Papers (CPs)
§ Repurchase Agreements (Repo)
§ Banker’s Acceptance
.
Advantages of money market
instrument
Asset Preservation
In spite of the relatively low returns, the money market can be a great way for investors to preserve, and even make, a little bit of money.
.Liquidity
The biggest advantage and the most attractive feature
of the money market is liquidity.
.Risks
There are risks in every investment, but the money
market is probably one of the safest places for your capital. After all, the
funds are invested in relatively secure government or other short-term,
high-quality debt.
.
Yield
Money market funds pay a yield based on the
holdings of the underlying fund. The yield is generally automatically
reinvested into the fund via purchase of additional shares in the fund. This
yield makes money market funds an attractive alternative to the mattress.
.
Comparison
of money market and stock market
.Capital markets are perhaps the
most widely followed markets. Both the stock and bond markets are closely
followed and their daily movements are analyzed as proxies for the general
economic condition of the world markets. As a result,
the institutions operating in capital markets – stock exchanges, commercial banks and all types of corporations, including nonbank institutions such as insurance companies and mortgage banks – are carefully scrutinized.
the institutions operating in capital markets – stock exchanges, commercial banks and all types of corporations, including nonbank institutions such as insurance companies and mortgage banks – are carefully scrutinized.
1. Maturity Period:
The money market deals in the lending and borrowing of
short-term finance (i.e., for one year or less), while the capital market deals
in the lending and borrowing of long-term finance (i.e., for more than one
year).
.
2. Credit Instruments:
.The main credit instruments of
the money market are call money, collateral loans, acceptances, bills of
exchange. On the other hand, the main instruments used in the capital market
are stocks, shares, debentures, bonds, securities of the government.
.
3. Nature of Credit Instruments:
.The credit instruments dealt with
in the capital market are more heterogeneous than those in money market. Some
homogeneity of credit instruments is needed for the operation of financial
markets. Too much diversity creates problems for the investors.
.
4. Institutions:
.Important institutions operating
in the’ money market are central banks, commercial banks, acceptance houses,
nonbank financial institutions, bill brokers, etc. Important institutions of
the capital market are stock exchanges, commercial banks and nonbank
institutions, such as insurance companies, mortgage banks, building societies,
etc.
.
5. Purpose of Loan:
.The money market meets the
short-term credit needs of business; it provides working capital to the
industrialists. The capital market, on the other hand, caters the long-term
credit needs of the industrialists and provides fixed capital to buy land,
machinery, etc.
.
6. Risk:
.The degree of risk is small in
the money market. The risk is much greater in capital market. The maturity of
one year or less gives little time for a default to occur, so the risk is
minimised. Risk varies both in degree and nature throughout the capital market.
.
7. Basic Role:
.The basic role of money market is
that of liquidity adjustment. The basic role of capital market is that of
putting capital to work, preferably to long-term, secure and productive
employment.
.
8. Relation with Central Bank:
.The money market is closely and
directly linked with central bank of the country. The capital market feels
central bank’s influence, but mainly indirectly and through the money market. Capital
markets shows lot of volatility moves with Central Bank ‘s(RBI ) Monetary and
credit policy related to liquidity.
Please refer to my post "Investment Planning Part -1" for more understanding of capital and money market funds.
