Financial Markets Can Be Classified As Either “Money Markets” (Short-Term Debt) Or “Capital Markets” (Long-Term Debt)

Financial markets can be classified as either money markets or capital markets. Short-term debt securities of many varieties are bought and sold in money markets. These short-term debt securities are often called money-market instruments and are essentially IOUs. For example, a bankers acceptance represents short-term borrowing by large corporations and is a money-market instrument. Treasury bills are an IOU of the government of Canada. Capital markets are the markets for long-term debt and shares of stock, so the Toronto Stock Exchange, for example, is a capital market.

The money market is a dealer market. Generally, dealers buy and sell something for themselves, at their own risk. A car dealer, for example, buys and sells automobiles. In contrast, brokers and agents match buyers and sellers, but they do not actually own the commodity. A real estate agent or broker, for example, does not normally buy and sell houses.

The largest money-market dealers are chartered banks and investment dealers. Their trading facilities, along with other market participants, are connected electronically via telephone and computer, so the money market has no actual physical location.

—Stephen A. Ross et al., Fundamentals of Corporate Finance, 4th Canadian ed. (Toronto: McGraw-Hill Ryerson, 2002), 17.