Capital markets are those in which stocks and long-term debt instruments are traded. Examples of these securities having maturities of greater than one year are common stocks and preferred stocks, corporate and government bonds, U.S. Treasury notes and bonds, and mortgages. Thus capital markets are comprised of both equity and debt instruments.
Money markets are those in which short-term debt securities with maturities of one year or less are traded. Examples of these securities are consumer loans, U.S. Treasury bills, commercial paper, negotiable certificates of deposit, and mutual funds investing in short-term debt securities. Thus money markets are comprised entirely of debt securities.
From the investor’s perspective, money-market instruments are attractive during periods of rising interest rates. Investing for the short term allows the investor to continually replace lower interest-bearing securities with those of higher interest rates as rates continue to rise.
Conversely, capital-market investments are more attractive when interest rates are falling. Being able to “lock in” a high interest with a long-term security protects the investor better than a series of short-term money-market instruments.