What comes to your mind when you hear the capital market and money market? A market that trades money for venture capital? Not quite right. For ordinary people, the capital market and money market are still foreign to their ears. However, for those of you who are in the business world, of course you are familiar with these two terms.
The capital market and money market are in principle a place to conduct transactions, but the objects are not consumer goods like those sold in markets in general, but securities. The objectives are varied, ranging from long and short-term investments, sources of working capital financing, to controlling the amount of money circulating in the community.
So, what is the difference between the capital market and the money market? To know and understand the difference, first identify what the capital market and money market are. The capital market is a place for buying and selling securities or long-term securities. Meanwhile, the money market can be understood as a place for buying and selling short-term securities.
From the understanding of the capital market and the money market, it actually reflects the difference between the two. Of course the difference is not that simple, here are more details.
• Market instruments
The capital market has different types of instruments from the money market. Capital market instruments include securities with long maturities of more than one year. On the other hand, money market instruments include short-term securities of less than one year.
The capital market instruments include:
Shares are instruments that are commonly traded in the capital market. This type of securities is issued by companies that have gone public. The purchase of shares of a company either by a legal entity or an individual indicates ownership of the company, it can be partial or even total.
For stock issuing companies, the sale of these securities is able to increase working capital in large quantities. Meanwhile, for the buyer, by owning shares of the company concerned, it means that he also owns the company so that he is entitled to get a share of the company’s profits every year which is called a dividend.
Bonds are also known as debentures. Companies that sell bonds issue a letter or certificate stating the existence of a loan with certain conditions. If there are parties who are willing to buy the bonds, the consequence is that the bond issuing company must return the principal loan along with the interest that has been agreed with the bond buyer.
Right is a type of securities derived from shares. The company issues rights and offers them to the old shareholders first. New shares purchased with rights tend to be cheaper. However, if the owners of the old shares do not wish to purchase new shares with rights, then they can sell the rights to other parties.
Types of derivative instruments or other derivatives of shares are warrants. The company issues warrants to give the holder the right to buy the company’s shares. Issuance of warrants is accompanied by conditions related to the price, quantity, and validity period. The advantage is that warrant holders can get capital gains because they have the right to buy shares at a price lower than the market price. However, buying this type of securities is not without risks. If the market price of the company’s stock drops, the warrant becomes meaningless.
As a type of derivative instrument from shares, options are securities that give the holder the right to buy or sell shares at a predetermined price.
• Mutual Funds
Mutual funds are a type of capital market instrument with the lightest risk. There is no need for special skills in observing market conditions, because mutual funds are similar to savings accounts, but can be traded.
Meanwhile, the types of money market instruments are:
• Money Market Securities
SBPU is also a debt instrument with a discount system but can be issued by the central bank or other financial institutions appointed by the central bank.
• Certificate of Deposit
Time deposits are money market instruments in the form of time deposits. These securities state the amount, interest rate, and maturity period. The validity of these securities cannot be extended automatically. Considering that these securities are not specifically issued in the name of the holder, there is a risk of being taken over by another party in the event of loss.
• Call Money
Simply put, call money is a debt instrument with a ‘spread’ system, because the period is quite short between 1-7 days. When a company needs additional funds quickly, it can use this instrument. Consequently, they must return immediately when the owner of the fund has charged or reminded the due date of the return.
• Repurchase Agreement
This money market instrument is an agreement to buy back securities that have been traded within a predetermined and mutually agreed time and price.
• Market players
Judging from the actors or players, the capital market tends to involve more parties than the money market. The capital market players consist of stock issuers (issuers), investors, underwriters, supporting institutions, brokers, dealers, guarantors, trustees, securities companies. , and a fund management company (investment company).
While the players in the money market generally include banks, foundations, insurance companies, government agencies, non-bank financial institutions, and individuals or members of the public.
• Supreme Market Authority
Everything related to the implementation of the capital market and money market is regulated by the government. In this case, the highest authority on the money market is Bank Indonesia (BI), while the capital market is the Financial Services Authority
• Market Mechanism
If viewed from the mechanism, the capital market is more complex than the money market. In the capital market, issuers must make a public offering. This means that the issuer must be a company that has gone public. Meanwhile, other capital market players must pay close attention to market conditions to find out the prospect of shares offered by issuers. That way, investors or investors can make a decision to buy or not the shares offered by the issuer. However, the process certainly involves other capital market players such as brokers or brokers, guarantors, and others.
The money market mechanism is simpler, because it is like buying and selling transactions, where parties who have more funds (investors) meet directly with those who need funds. If both have made an agreement, then the transaction is complete.
After knowing and understanding the difference between the capital market and the money market, you can become one of the players who liven up one market or even both. You are interested?