Comparison Between a Money Market and a Debt Market

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Both debt and money markets are popular financial markets on which large amounts of money are traded between different businesses and investors; however, they each deal with a different type of funding. The markets give businesses different types of obligations and investors different perks when they deal in one or the other. Both, however, are used by public businesses to raise money.

Debt Market

  • Debt markets are used to trade debt instruments. In other words, the business issues a debt instrument, and an investor buys it. In a specific period of time, the investor is paid back for the debt, along with interest. Interest rates and time frames can vary according to the instrument. Bonds are one of the most widely trade debt instruments on the debt market. Both large corporations and governments use the debt market to raise money or to change economic conditions.

Money Market

  • On the money market, equity is traded instead of debt. This market is more commonly known as the stock market. In the stock market, stocks are sold as securities that give investors the right to a certain amount of the company's earnings and assets. There are many different types of stock shares sold to different types of investors, but they do not exist as a debt to be paid off.

Business Differences

  • To the business, the difference between a money and debt market is important. Every bond that the business issues must be paid back over time--it is a loan, and the business is borrowing from investors. Eventually the loan comes due. Businesses should only sell bonds when they are confident they will have enough money in the future to meet their debt obligations. Stocks, on the other hand, do not incur debt, but they do divide ownership of the company among investors.

Holder Difference

  • To the investor holding the bond or stock, the difference deals mostly with the return on his investment. When an investor buys stock, he is buying ownership of the business and can claim the right to vote on matters the directors of the business decide. Investors do not have any ownership of the business when they buy bonds; they receive only an obligation from the business to repay the loan.

Risk

  • Traditionally, the debt market is more secure than the money market. Stock dividends can be reduced or suspended when a business suffers, but bond obligations must be paid as the contract stipulates. This also means that stocks have a greater chance for growth than bonds because their success depends on the success of the company.

References

  • Photo Credit economy image by Madera from Fotolia.com
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