Capital Markets Vs Money Market

Financial markets are markets for financial assets or liabilities. A useful way to categorize financial market is according to maturity. Financial markets are categorized into money markets and capital markets.  Money markets are markets for financial assets and liabilities of short maturity, usually considered to be less than one year. The market for short-term Eurocurrency deposits and loans is an example of a money market. Capital markets are markets for financial assets and liabilities with maturities greater than one year. These markets include long-term government and corporate bonds as well as common and preferred stock.  The most important difference between short-and long-term versions of a particular financial asset is in the liquidity of the asset. Liquidity refers to the ease with which you can exchange an asset for another asset of equal value.  Consider the floating-rate Eurocurrency market. At longer maturities, liquidity in the Eurocurrency markets dries up even for the most actively traded currencies. There is very little liquidity in Eurodollar deposits and loans with maturities greater than two years, and most other currencies have low liquidity beyond one year. Similarly, although there are forward markets for major currencies in maturities up to ten years, liquidity is poor and bid-ask spreads are large at distant forward dates. Covered interest arbitrage is quite effective at enforcing interest rate parity over long short maturities, but it is much less effective at enforcing interest rate parity over long maturities because of poor liquidity in the long-term forward currency and Eurocurrency markets.  Despite the apparently arbitrary classification of financial markets according to maturity, the distinction is important because market participants tend to gravitate toward either short or long-term instruments. Bond investors match the maturities of their assets to those of their liabilities, and so have strong maturity preferences. Commercial banks tend to lend in the short-and intermediate-term markets to offset their short-and intermediate-term liabilities.  Like insurance companies and pension funds invest in long-term assets to counterbalance their long-term obligations. The distinctions between capital and money markets are also often encoded in national regulations governing public securities issues.