Explain the difference between money markets and capital markets?

• A. Money markets trade short-term debt instruments for liquidity; capital markets trade long-term securities for growth and investment.
• B. Money markets trade equities; capital markets trade currency.
• C. Money markets issue new securities; capital markets trade existing securities.
• D. Money markets are global; capital markets are local.

Answer: (A)

Money markets focus on the near term and liquidity. They trade short‑term debt instruments—maturity of one year or less—such as Treasury bills, commercial paper, and certificates of deposit. These tools are chosen for safety and easy access to cash, helping institutions manage day‑to‑day funding needs.

Capital markets, on the other hand, are about long‑term funding for growth and investment. They deal with longer‑term securities like stocks and bonds (maturities well beyond one year) and include both issuing new securities and trading existing ones. This is where companies raise capital for expansion and investors seek longer‑term returns.

The contrast is about time horizon and instrument types: short‑term, highly liquid debt versus long‑term securities used to fund bigger, longer projects and growth. Some statements that place equities or currency in the money markets, or claim money markets only issue new securities, don’t fit this distinction, since equities and longer‑term bonds lie in capital markets, and both markets can handle various issuances and have global participation.