Explain in extensive detail and give a detailed example of t

Explain in extensive detail and give a detailed example of the following financial markets, make sure to include who participates in each market:

Money Market

Capital Market

Solution

Financial market is a place where the buyer and seller come together to invest or raise capital respectively.

Financial market mostly comprises of Money market and capital market.

The main difference between both the market is that the money market is for short term money raise and capital market is used to raise capital for longer term. Capital market comprises of corporates and government bodies where they issue stocks and bonds. Corporate issue stocks, mortgage bonds etc. Government issue government bonds. Government is not publicly listed and so they do not issue stocks.

Money market is used to raise short term funds which is mostly within a year. This is to maintain liquidity for day to day activities if funds are less for a particular day. This money market has less risk compared to capital market. The maturity of the money market instruments are less than a year. Companies who wants to invest the funds overnight also participate in the money market.

The purpose of both the market is to transfer risk and maintain liquidity in the market. The capital market is closely monitored and scrutinized since the risk is high. Both the market provides a space to raise funds.