Difference between Capital Market, Money Market and Commodity Market

A financial market is a place that unites purchasers and dealers to exchange monetary resources, for example, stocks, securities, commodities, currencies and derivatives. The motivation behind a financial market is to set costs for worldwide exchange, raise capital and exchange liquidity and degree of risk. In spite of the fact that there are numerous segments to a financial market, three of the most generally utilized are capital markets, money markets and commodity market.

In this article we will found out about these three segments of financial market and the differences between them.

Capital Market

Capital market is for selling and buying of debt and equity instruments. Capital markets direct investments and savings between suppliers of capital, for example, retail financial specialists and institutional speculators, and clients of capital like organizations, government and people. Capital markets are crucial for the working of an economy, since capital is a discriminating segment for creating economy output. Capital markets incorporate primary markets, where new stock and security issues and sold to investors, and secondary markets, which exchange existing securities.

Money Market

Money market is a section of the money related business in which budgetary instruments with high liquidity and short maturities are exchanged. The money market is utilized by members as methods for borrowing and giving in the short term, from a few days to simply under a year. Money market securities comprise of negotiable certificates of deposit (CDs), commercial paper, Bankers acceptances, federal funds, U.S. Treasury bills, municipal notes and repurchase agreements (repos).

Commodity Market

Commodity market originated from the agricultural community. Commodity market includes all types of raw materials. It deals in grain, cattle, metal, coffee, sugar, gasoline and oil.

Capital Market vs. Money Market vs. Commodity Market

Capital Market is recognized from money market on the premise of the maturity period, credit instruments and the foundations:

Credit Instruments

The primary instruments utilized as a part of the capital market are stocks, debentures, shares, bonds and securities of the legislature.

The primary credit instruments of the money market are bills of exchange, call money, insurance advances and acceptances.

The primary instruments of commodity market are commodities like grains and metals.

Time period:

The capital market is compact in borrowing and lending of long term funding which means the time period is more than one year.

The money market makes an agreement for borrowing and lending of short term funds which shows time period is one year or less than one year.

The commodity market works on contracts to be rewarded in future. The farmers or producers agree to sell their product at a set time in future at a given fixed price.

Form of credit instruments:

The credit instruments managed in the capital market are heterogeneous than those in money market.

In money market credit instruments are less heterogeneous and homogeneity exists here.

Institutions:

The fundamental institutions of the capital market are commercial banks, stock exchanges and nonbank foundations, for example, mortgage banks, insurance agencies, building social orders, and so forth.

The central institutions working in the’ money market are commercial banks, central banks acceptance houses, bill brokers, nonbank budgetary organizations and so forth.

The main institutions working in commodity market are farmers, producers, money-lenders, traders, buyers and banking system.

Reason of loan:

The capital market accommodates the long term fund needed by the industrialists and supply fixed capital to purchase land, apparatus, and so on.

The money market meets the short term funding needed in business; it gives working cash-flow to the industrialists.

Risk:

In capital market, the risk is more as compared to that in money market. The reason behind this is the time period. The maturity of more than one year provides more time for default. But, in capital market risk differs both in nature and degree.

In money market, risk factor is very small because time period is less than one year is given so defaulter has less time to default that’s way the risk is minimized.

Risk is very high in commodity market. Commodities are volatile i.e. their prices often experience huge swings. Commodity investors sometimes earn huge returns, but they can suffer huge losses as well.

Essential role:

The fundamental part of capital market is that of giving capital something to do, ideally to long term, prolific and secure employment.

The essential part of money market is that of making adjustment of liquidity.

Commodity market is most important for an economy as it deals with basic necessities required for living.

Connection with Central Bank:

The capital market only undergoes according to central bank’s authority. However, indirect connection exists and works with the help of money market.

The money market is intimately and directly connected with central bank of the nation.

Market Regulation:

The institutions are not firmly regulated under capital market.

Commercial banks are firmly controlled in money market.

Conclusion

From the above article we come to know that the instruments in capital market are stocks, debentures, shares, bonds and securities while in money market there are bills of exchange, call money, insurance advances and acceptances. In capital market borrowing and lending is there for long term but it is for short term in money market. The institutions of the capital market are commercial banks, stock exchanges and nonbank foundations whereas commercial banks, central banks acceptance houses, bill brokers etc are institutions in money market. The main part of capital market is that of giving capital something to do and secure employment while the part of money market is that of making adjustment of liquidity. Commodity market uses commodities as investments. Commodities help hedge against inflation, wars, stock and bond losses etc. Investors can invest directly in commodities or they can opt for investment in commodity funds.Which is better in your opinion?