How do I Distinguish Between Money Markets and Capital Markets?
There are, broadly speaking, two types of markets that you can invest money into. The type of market you choose depends entirely on your investment goals. Investment markets that focus on long-term investment will be suitable for individuals who do not have a need for immediate access to their investments. Short-term markets allow investors to liquidate holdings quickly to fund other investment opportunities--typically longer-term opportunities. When you invest, you should understand the difference between an investment in a money market and an investment in a capital market.
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Instructions
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Gather your financial statements and prospectus for future investments. A prospectus lists various investments or a single investment in a company or financial product. It will tell you what the investment is and what it is comprised of, as well as the investment objectives of the investment. Your current financial statements also provide clues to existing financial assets that you hold and will help you determine what kinds of investments you have.
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Look for investments in short-term investments. Examples of short-term investments would be treasury bills, bank certificates of deposit, commercial paper, federal funds, bankers' acceptances and short-term mortgage obligations. These types of investments are highly liquid and generally have maturity dates of one year of less. The risk of default on these investments is very low, since the investment has such a short maturity. Money markets always invest in these short-term investments and for the explicit purpose of providing liquidity.
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Look for investments in long-term investments like initial stock or bond offerings, stocks traded on an exchange in the secondary market like the NASDAQ, S&P500 or the DOW, and other investments that are generally held for longer than one year or that have maturity dates of longer than one year (or no maturity dates at all). These kinds of investments always comprise a capital market.
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References
- "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007
- "Ernst & Young's Personal Financial Planning Guide, 5th Edition"; Martin Nissenbaum, Barbara J. Raasch, Charles L. Ratner; 2004
- Investopedia: Capital Markets
- Investopedia: Money Market
- Photo Credit stock market analysis screenshot image by .shock from Fotolia.com
