Explain the differences between debt and equity markets, primary and secondary markets, exchanges and OTC markets, and money and capital markets.
The debt market differs from the equity market, in the sense that debt instruments are sold in the debt market while stock or shares are sold in the equity market. Debt instruments are issued in the debt market by the issuer to obtain funds from the instrument holder, like bonds or mortgages. On the other hand, equities are issued in the equity market. A clear difference can be brought up when we compare the instruments in each of these markets, their characteristics.
Instruments sold in the equity market do not have a maturity date, while the instruments sold in the debt market have a maturity date. In other words, we are saying debt instruments like bonds have the maturity, which can assist us in differentiating debt instruments into short-term, medium-term, and long-term instruments depending on their date to maturity. While on the other hand, equity instruments have an infinite lifetime, they don’t have a maturity date.
Purchase of debt instruments in the debt market provides a contractual agreement to pay the holder a fixed interest amount of money periodically and the repayment of the redemption value on the maturity date, while the purchase of equity gives the holders of the stock a claim of ownership in the company and right to vote on important issues of the company, while this does not exist in the debt market.
Primary and Secondary markets
The primary market is the market where new instruments are sold for the first time, while the secondary market is the market where instruments have been purchased before being sold again. A primary market is a financial market in which new issues of security, such as a bond or a stock, are sold to initial buyers by the corporation or government agency borrowing the funds. A secondary market is a financial market in which securities that have been previously issued can be resold. When instruments are sold for the first time, they are sold to the underwriting bank, sometimes called investment bank, in this regard, these instruments are not directly available to the public, while the Stock Exchange are an example of secondary markets, in which previously issued shares are sold again. Other examples of secondary markets are foreign exchange markets, futures markets, and options markets.
Exchanges and OTC markets
Secondary markets are divided into exchange markets and over-the-counter markets (OTC). The difference between the exchange market and OTC market is that the exchange market occurs when buyers and sellers of securities meet in one central location to conduct trades, while OTC markets occur when buyers and sellers in different places or locations stand to buy and sell securities over the counter to anyone who comes to them and willing to accept their prices. Computer contact is used for the OTC markets, and the market is just competitive as the exchange market. Foreign exchange is another example of the OTC market.
Money and capital markets
Differentiating markets can also be done by comparing the maturity of instruments traded in each of the markets. For instance, the money market is a financial market in which only short-term debt instruments are traded, while the capital market is the market where longer-term debt and equity instruments are traded. Short-term when maturity is less than one year, and long-term when the maturity is greater than one year. Money market instruments are more liquid compared to capital markets and they tend to be widely traded. Instruments in the money market tend to have smaller fluctuations in prices than instruments in the capital market, therefore investment in the money market tends to be safer compared to investment in capital markets where fluctuations in prices are greater. Insurance companies and pension funds institutions tend to invest in capital markets because the funds in these institutions will be required after a considerable amount of time.
