Money vs Capital Markets

Discuss the differences between the Money and Capital Markets, and the types of securities trade in those markets.  Give examples. (30 MARKS)

Introduction

A financial market is a market in which people trade financial securities, commodities, and other fungible items of value at low transaction costs and at prices that reflect supply and demand. Securities include stocks and bonds, and commodities include precious metals or agricultural products. The term market in economics means the aggregate of possible buyers and suppliers of a certain good or service and the transactions between them. Types of financial markets include capital markets, commodity markets, money markets, foreign exchange markets and futures markets among others (Chuhan, 2002). The aim of this essay will be to discuss the differences between the money market and the capital market and the types of securities traded in those markets.

Capital Markets

A capital market is one in which individuals and institutions trade financial securities. Organizations and institutions in the public and private sectors also often sell securities on the capital markets in order to raise medium to long term financing thus, this type of market is composed of both the primary and secondary markets (Goldsmith, 2009). In primary markets, new stock or bond issues are sold to investors, often via a mechanism known as underwriting. The main entities seeking to raise long-term funds on the primary capital markets are governments (which may be municipal, local or national) and business enterprises (companies). Governments only issue bonds, whereas companies often issue either equity or bonds. The main entities purchasing the bonds or stock include pension funds, hedge funds, sovereign wealth funds, and less commonly wealthy individuals and investment banks trading on their own behalf (Goldsmith, 2009). In the secondary markets, existing securities are sold and bought among investors or traders, usually on an exchange,...