What is the primary distinction between capital markets and money markets?

The primary distinction between capital markets and money markets lies in the nature of the securities traded and their duration. Capital markets are focused on long-term securities, which typically have maturities of more than one year. These can include stocks and bonds that finance long-term investments in both businesses and governments. In contrast, money markets are centered around short-term loans and securities, usually with maturities of one year or less. This includes instruments like Treasury bills, commercial paper, and repurchase agreements, which are critical for managing liquidity and short-term financing needs.

This distinction is foundational in understanding the structure of the financial markets and the types of investors that participate in each market. While capital markets are vital for long-term capital formation, money markets play an essential role in the short-term funding needs of individuals, companies, and governments, acting as a mechanism for managing cash flows and risks related to interest rates. Thus, the focus on the duration of the securities is what clearly differentiates the two markets.