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After saving up some cash, you are now thinking about investing it somewhere. But with so many options out there, this process can feel overwhelming. One major decision that everyone ponders is whether to play safe by investing in the money market or take a chance and put the savings in the stock market for potentially higher returns. Well, both markets come with their benefits and drawbacks.
In this blog, we’ll break down the differences between the share market vs money market in a simple way to help you make an informed decision.
What is Share Market?
The share market is where people invest in companies for the long term. When you buy a stock, you’re getting a small piece of a company. You get to own that share until the company closes or joins another one. Some companies also pay dividends on the shares held by investors every few months.
As the share market is a risky investment, here the value of the stocks can either increase or decrease according to market trends and company performance. You can make your investments liquid by selling off your owned shares.
Financial instruments quite common to the share market include- derivatives, ETFs, mutual funds, stocks, equities, etc.
As of now, share markets are classified into two types-
- Primary- This is where companies sell their stocks for the first time directly to their investors.
- Secondary- This happens when people who already bought shares earlier decide to sell them to other investors. The company that originally sold these stocks doesn’t get money from these small resales immediately, but it does impact their future prices.
What is money market?
The money market is where short-term, highly liquid investments are available. They help meet immediate cash needs and facilitate the movement of funds around different sectors. The interest rates charged in money markets become a standard for other debt securities and are also used by government bodies like RBI to frame monetary policy.
You might think that currency trading is related to the money market, but it has nothing to do with it. Money market investments are short-term loans offered to banks and companies that pay interest and return principal when they mature. For example- certificates of deposit, commercial paper, and treasury bills.
Apart from securities, you can also invest in money market-related mutual funds. They’re more commonly known as cash management accounts. Everyone can invest in the money market from individual investors, and companies, to financial institutions like banks and brokerage firms.
Liquidity offered by money markets
The main purpose of the money market is to ensure liquidity. It acts as an essential tool for banks, companies, and governments to maintain enough cash every day. By doing that it helps them to avoid running out of money and opting for expensive loans. On the other hand, it also prevents them from stashing up excess cash that is not earning any interest.
Difference between share market vs money market
Now that we know what each market constitutes, let’s try to understand how the share market vs money market differ from each other.
- Purpose
Money market funds are used by companies to fulfil their short-term cash needs, like paying bills and salaries. This means they only borrow a small part of their total assets to create liquidity and fulfil their cash needs.
The purpose of share markets, however, is to raise money for the company’s long-term projects. The funds they get from listing shares become a part of their assets.
- Instruments
The money market includes financial instruments like treasury bills, commercial papers, and certificates of deposit. All of these fall under short-term investments.
The share market includes bonds, ETFs, derivatives, and stocks as financial instruments and they are usually meant for long-term investment.
- Liquidity
Money market instruments are easier to turn into cash compared to share market instruments. Most money market investments can be quickly converted into cash and offer good returns.
On the other hand, share markets are less liquid as they are meant for long-term investments and cannot be liquified easily.
- Maturity period
Money market investment maturity typically lasts from one day to one year.
Share market investments have no set maturity limit as they are meant for long-term growth.
- Risk
Money market investments are often considered low-risk because they’re short-term and the funds raised aren’t used to fund risky projects.
On the flip side, share market investments are more riskier because the capital raised is invested in long-term projects without any guarantee for returns.
- Active players
Banks and other financial institutions are the main players in money markets. Banks usually need short-term funding to meet their regulatory requirements like offering loans.
The active participants in the share market include stockbrokers, mutual funds, individual investors, underwriters, insurance companies, commercial banks, and stock exchanges.
These differences might have cleared some of your doubts related to the share certificate vs money market debate.
Choosing between share market vs money market
When deciding where to invest your savings, it’s crucial to consider your current financial situation, future needs, and the amount you’re investing.
If you need quick access to your money and can’t commit to long-term investments, but still want to fight inflation, the money market will become your best choice. Money market investments are highly liquid and low-risk, making them practically interchangeable with cash.
On the other hand, if you don’t need your savings anytime soon, and you’re looking to earn better returns, the share market can become your ideal choice. While you’re holding stocks for the long term, you also get dividends on the side with potential price appreciation.
With this, it’s also important to consider the tax implications on both types of investments. Interest earned from money market investments is taxed as ordinary income while stocks held for over a year and dividends received are taxed at a much lower rate.
Ultimately, the best investment choice depends on your requirements and financial goals. It is expected that you seek professional help before investing your savings.
Conclusion
The share market promotes long-term investments in stocks, offering the potential for higher returns while the money market focuses on short-term investments for people with a lower risk appetite. It’s crucial to assess your financial needs and risk tolerance carefully before deciding between the two. To learn more, stay tuned to StockGro.
FAQ’s
The money market is where short-term lending and borrowing of funds occur. It deals with things like treasury bills and commercial papers, providing quick cash solutions.
The share market is where long-term investments in stocks and other securities take place. It includes both primary and secondary markets, where companies raise capital and stocks are traded.
Some risks of money markets include low returns compared to other investments, inflation risk, and interest rate risk. However, it’s generally considered safer than the share market.
Yes, the money market is a part of the capital market, but the share market is broader, encompassing both primary and secondary markets for stocks.
In India, the share market is bigger than the money market. The size of the money market was ₹1.298 trillion as of March 2024, while the share market’s size was ₹334.7 trillion as of December 2023, according to the Reserve Bank of India.