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The money market is where short-term debt and lending takes place; the capital market is designed for long-term assets, such as stocks and bonds. The former is considered a safer place to park one’s money; the latter is seen as riskier but potentially more rewarding. While the money market and the capital market are both aspects of the larger global financial system, they serve different goals for investors.

Understanding the difference between money market and capital market matters plays a role in understanding the market as a whole. Whether you hold assets that are part of the money market vs. capital market can influence your investment outcomes and degree of risk exposure.

What Is the Money Market?

The money market is where short-term financial instruments, i.e. securities with a holding period of one year or less, are traded. Examples of money market instruments include:

•   Bankers acceptances. Bankers acceptances are a form of payment that’s guaranteed by the bank and is commonly used to finance international transactions involving goods and services.

•   Certificates of deposit (CDs). Certificate of deposit accounts are time deposits that pay interest over a set maturity term.

•   Commercial paper. Commercial paper includes short-term, unsecured promissory notes issued by financial and non-financial corporations.

•   Treasury bills (T-bills). Treasury bills are a type of short-term debt that’s issued by the federal government. Investors who purchase T-bills can earn interest on their money over a set maturity term.

These types of money market instruments can be traded among banks, financial institutions, and brokers. Trades can take place over the counter, meaning the underlying securities are not listed on a trading exchange like the New York Stock Exchange (NYSE) or the Nasdaq.

You may be familiar with the term “money market” if you’ve ever had a money market account. These are separate from the larger money market that is part of the global economy. As far as how a money market account works goes, these bank accounts allow you to deposit money and earn interest. You may be able to write checks from the account or use a debit card to make purchases or withdrawals.

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How Does the Money Market Work?

The money market effectively works as a short-term lending and borrowing system for its various participants. Those who invest in the money market benefit by either gaining access to funds or by earning interest on their investments. Treasury bills are an example of the money market at work.

When you buy a T-bill, you’re essentially agreeing to lend the federal government your money for a certain amount of time. T-bills mature in one year or less from their issue date. The government gets the use of your money for a period of time. Once the T-bill matures, you get your money back with interest.

What Is the Capital Market?

The capital market is the segment of the financial market that’s reserved for trading of long-term debt instruments. Participants in the capital market can use it to raise capital by issuing shares of stock, bonds, and other long-term securities. Those who invest in these debt instruments are also part of the capital market.

The capital market can be further segmented into the primary and secondary market. Here’s how they compare:

•   Primary market. The primary market is where new issuances of stocks and bonds are first offered to investors. An initial public offering or IPO is an example of a primary market transaction.

•   Secondary market. The secondary market is where securities that have already been issued are traded between investors. The entity that issued the stocks or bonds is not necessarily involved in this transaction.

As an investor, you can benefit from participating in the capital market by buying and selling stocks. If your stocks go up in value, you could sell them for a capital gain. You can also derive current income from stocks that pay out dividends.

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How Does the Capital Market Work?

The capital market works by allowing companies and other entities to raise capital. Publicly-traded stocks, bonds, and other securities are traded on stock exchanges. Generally speaking, the capital market is well-organized. Companies that issue stocks are interested in raising capital for the long-term, which can be used to fund growth and expansion projects or simply to meet operating needs.

In terms of the difference between capital and money market investments, it usually boils down to three things: liquidity, duration, and risk. While the money market is focused on the short-term, the capital market is a longer term play. Capital markets can deliver higher returns, though investors may assume greater risk.

Understanding the capital market is important because of how it correlates to economic movements as a whole. The capital market helps to create stability by allowing companies to raise capital, which can be used to fund expansion and create jobs.

Differences Between Money Markets and Capital Markets

When comparing the money market vs. capital market, there are several things that separate one from the other. Knowing what the key differences are can help to deepen your understanding of money markets and capital markets.

Purpose

Perhaps the most significant difference between the money market and capital market is what each one is designed to do. The money market is for short-term borrowing and lending. Businesses use the money market to meet their near-term credit needs. Funds are relatively safe, but typically won’t see tremendous growth.

The capital market is also designed to help businesses and companies meet credit needs. The emphasis, however, is on mid- to long-term needs instead. Capital markets are riskier, but they may earn greater returns over time than the money market.

Length of Securities

The money market is where you’ll find short-term securities, typically with a maturity period of one year or less, being traded. In the capital market, maturity periods are usually not fixed, meaning there’s no specified time frame. Companies can use the capital market to fund long-term goals, with or without a deadline.

Financial Instruments

As mentioned, the kind of financial instruments that are traded in the short-term money market include bankers acceptances, commercial paper, and Treasury bills. The capital market is the domain of stocks, bonds, and other long-term securities.

Nature of Market

The structure and organization of the money market is usually informal and loosely organized. Again, securities may be traded over-the-counter rather than through a stock exchange. With the capital market, trading takes place primarily through exchanges. This market is more organized and formalized overall.

Securities Risk

Risk is an important consideration when deciding on the best potential places to put your money. Since the money market tends to be shorter term in nature, the risk associated with the financial instruments traded there is usually lower. The capital market, on the other hand, may entail higher risk to investors.

Liquidity

Liquidity is a measure of how easy it is to convert an asset to cash. One notable difference between capital and money market investments is that the money market tends to offer greater liquidity. That means if you need to sell an investment quickly, you’ll have a better chance of converting it to cash in the money market.

Length of Credit Requirements

The money market is designed to meet the short-term credit requirements of businesses. A company that needs temporary funding for a project that’s expected to take less than a year to complete, for example, may turn to the money market. The capital market, on the other hand, is designed to cover a company’s long-term credit requirements with regard to capital access.

Return on Investment

Return on investment or ROI is another important consideration when deciding where to invest. When you invest in the money market, you’re getting greater liquidity with less risk but that can translate to lower returns. The capital market can entail more risk, but you may be rewarded with higher returns.

Timeframe on Redemption

Money market investments do not require you to hold onto them for years at a time. Instead, the holding period and timeframe to redemption is likely one year or less. With capital market investments, there is typically no set time frame. You can hold onto investments for as long as they continue to meet your needs.

Relevance to Economy

The money market and capital market play an important role in the larger financial market. Without them, businesses would not be able to get the short- and long-term funding they need.

Here are some of the key differences between money markets and capital markets with regard to their economic impacts:

•   The money market allows companies to realize short-term goals.

•   Money market investments allow investors to earn returns with lower risk.

•   Capital markets help to provide economic stability and growth.

•   Investors can use the capital market to build wealth.

Deciding Which Market to Invest In

Deciding whether to invest in the money market or capital market can depend on several things, including your:

•   Investment goals and objectives

•   Risk tolerance

•   Preferred investment style

If you’re looking for investments that are highly liquid and offer a modest rate of return with minimal risk, then you may turn to the money market. On the other hand, if you’re comfortable with a greater degree of risk in exchange for the possibility of earning higher returns, you might lean toward the capital market instead.

You could, of course, diversify by investing in both the money market and capital market. Doing so may allow you to balance higher-risk investments with lower ones while creating a portfolio mix that will attempt to produce the kind of returns you seek.

Alternatives to Money and Capital Markets

Aside from the money and capital markets, there are other places you can keep money that you don’t necessarily plan to spend right away. They include the different types of deposit accounts you can open at banks and credit unions. Specifically, you may opt to keep some of your savings in a certificate of deposit account, high-yield checking account, or traditional savings account. Here’s a closer look:

High-Yield Checking Accounts

Checking accounts are designed to hold money that you plan to use to pay bills or make purchases. Most checking accounts don’t pay interest but there are a handful of high-yield checking accounts that do.

With these accounts, you can earn interest on your checking balance. The interest rate and APY (annual percentage yield) you earn can vary by bank. Some banks also offer rewards on purchases with high-yield checking accounts. When looking for an interest-checking account, be sure to consider any fees you might pay or minimum balance requirements you’ll need to meet.

Traditional Savings Accounts

A savings account can be another secure place to keep your money and earn interest as part of the bargain. The different types of savings accounts include regular savings accounts offered at banks, credit union savings accounts, and high-yield savings accounts from online banks.

Of those options, an online savings account typically has the highest interest rates and the lowest fees. The trade-off is that you won’t have branch banking access, which may or may not matter to you.

The Takeaway

There are lots of reasons why people do not invest their money. A lack of understanding about the difference between money market vs. capital market investments can be one of them. Once you understand that the money market typically involves short-term, lower-risk debt instruments, while the capital market likely revolves around longer-term ones with higher risk and reward, you will be on your way to better knowing how the global financial market works.

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FAQ

What are the similarities between a money market and capital market?

Both the money market and the capital market are intended to make it easier for businesses and companies to gain access to capital. The main differences between money markets and capital markets are liquidity, duration, and the types of financial instruments that are traded. Both also represent ways that consumers can potentially grow their money by investing.

How is a money market and capital market interrelated?

The capital market and the money market are both part of the larger financial market. The money market works to ensure that businesses are able to reach their near-term credit needs while the capital market helps companies raise capital over longer time frames.

Why do businesses use the money markets?

Businesses use the money market to satisfy short-term credit and capital needs. Short-term debt instruments can be traded in the money market to provide businesses with funding temporarily as well as to maintain liquid cash flow.

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SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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Real estate crowdfunding allows investors to pool funds together to invest in property. Crowdfunding has become a popular way to invest in real estate, and gain exposure to an alternative asset class without owning property directly.

Adding real estate to a portfolio can increase diversification while creating a potential buffer against inflation. Real estate crowdfunding platforms make it possible to invest in commercial and residential properties online, with potentially low barriers to entry. But accredited and nonaccredited investors (retail investors) are subject to different rules.

How Real Estate Crowdfunding Works

Real estate crowdfunding platforms seek out investment opportunities and vet them before making them available to investors. The platform then enables multiple investors to fund property investments at lower amounts than the actual property would cost. The minimum investment varies by platform, and might range from a few hundred dollars to upwards of $5,000.

Real estate investors then gain a proportional share of the profits. Depending on the nature of the investment, investors may see interest payments, rental income, or dividends. If a property is sold or assets are otherwise liquidated, investors could also see a profit.

Regulation crowdfunding makes real estate crowdfunding possible, as entities can raise capital from investors without registering with the SEC, as long as they offer or sell less than $5 million in securities.

Real Estate Crowdfunding Examples

Investors can join a real estate crowdfunding marketplace and browse investment options, which may include:

•   Individual residential properties

•   Retail space

•   Office buildings

•   Warehouses and storage facilities

•   Multifamily housing

•   Real estate investment trusts (REITs)

•   Real estate funds

Rather than concentrating capital in a single piece of property, real estate crowdfunding allows investors to distribute their capital among different types of properties. If you’re interested in how to invest in real estate in a hands-off way, crowdfunding can help you do it.

Crowdfunding Explained

What is crowdfunding? In simple terms, it’s the act of raising money from a crowd or pool of investors.

Crowdfunding is possible through Title III of the 2012 Jumpstart Our Business Startups (JOBS) Act. The Act’s purpose was to make it easier for small businesses to raise funds following the fallout of the 2008 financial crisis.

The Securities and Exchange Commission (SEC) subsequently adopted a series of rules allowing crowdfunding to be applied to real estate investments.1,2

Recommended: Alternative Investments: Definition, Example, Benefits, & Risks

Crowdfunded Real Estate for Accredited and Nonaccredited Investors

Today, accredited and nonaccredited (retail) investors can invest in crowdfunded real estate, but there are different rules for each.

Accredited Investors

An accredited investor, according to the SEC, is someone who:

•   Has a net worth exceeding $1 million, not including the value of their primary residence, OR

•   Had income exceeding $200,000 annually ($300,000 for married couples) in each of the two prior years and expects the same level of income going forward, OR

•   Holds a Series 7, Series 65, or Series 82 securities license

Investors who meet the qualifications to be accredited in the eyes of the SEC may invest any amount in crowdfunded real estate.

Nonaccredited Investors

Retail investors who don’t meet the criteria for accredited investors may be limited in how much they can invest in any Regulation Crowdfunding offering in any 12-month period. If either your income or net worth is less than $124,000, during any 12-month period you can invest up to $2,500, or 5% of your income or net worth, whichever is greater.

If both your income and net worth are $124,000 or higher, during any 12-month period you can invest up to 10% of your annual income or net worth, whichever is greater (not more than $124,000 total).

Advantages and Disadvantages of Real Estate Crowdfunding

Here’s a closer look at how the potential benefits and drawbacks of this alternative strategy compare.

Pros

Holding crowdfunded real estate in a portfolio can offer potential advantages:

•   Minimum investments may be as low as a few hundred dollars.

•   Crowdfunded property investments may yield above-average returns for investors who are comfortable with a longer holding period and highly illiquid assets.

•   Investors have flexibility in choosing which type of property investments they’d like to fund, based on their goals and risk tolerance.

•   Direct ownership isn’t required, which means there’s no need for investors to get a mortgage, come up with down payment funds, or deal with the headaches of managing a rental property.

•   Nonaccredited investors are not shut out of crowdfunding real estate, thanks to SEC rulemaking, but are subject to other restrictions.

Cons

While there are some attractive features associated with real estate crowdfunding, there are some things investors may want to be wary of:

•   Real estate crowdfunding platforms may charge hefty fees, which can detract from overall investment earnings.

•   Generally speaking, crowdfunded real estate is illiquid since you’re meant to leave your capital in the investment for the duration of the holding period.

•   Taxes on real estate gains can be complicated, as the dividend portion is typically taxed differently than profit from sales of properties. You may want to consult a professional.

•   Returns are not guaranteed, and properties may underperform as market or economic conditions change.

•   Nonaccredited investors are limited in how much they can invest in crowdfunded real estate by SEC regulations (see above).

Real Estate Crowdfunding Platforms

Online platforms allow investors to crowdfund real estate with a relatively low minimum investment amount. A typical minimum investment is $10,000 though some platforms allow investors to get started with $500 or less.

When comparing platforms that crowdfund real estate, it’s helpful to consider:

•   Minimum and maximum investment thresholds

•   Range of investment options

•   Investment holding periods

•   Fees

•   Investment performance

•   Vetting and due diligence

It’s also important to look at whether a platform works with accredited or nonaccredited investors. The best real estate crowdfunding platforms thoroughly vet properties before making them available to investors, have low minimum investment thresholds, and charge minimal fees.

How to Get Started

If you’re interested in real estate crowdfunding you’ll first need to decide how much money you’re comfortable investing. How much of your portfolio you should allocate to real estate investments can depend on:

•   Your age and time horizon for investing

•   Investment goals

•   Risk tolerance

•   Risk capacity, meaning how much risk you need to take to reach your goals

There’s no magic number to aim for. Some investors may be comfortable allocating a larger portion of their portfolio to alternative investments like real estate while others may prefer to limit their allocation to 5% or 10% instead.

Once you’ve got an amount in mind you can move on to researching real estate crowdfunding platforms. Remember to look at whether platforms work with nonaccredited investors if you don’t yet qualify for accredited status.

The Takeaway

Real estate crowdfunding offers an exciting opportunity to expand your portfolio beyond traditional stocks and bonds. You might consider this option alongside REITs, real estate funds, or real estate stocks if you’d like to reap some of the benefits of property investing without having to purchase a rental unit or a fix-and-flip home.

Ready to expand your portfolio's growth potential? Alternative investments, traditionally available to high-net-worth individuals, are accessible to everyday investors on SoFi's easy-to-use platform. Investments in commodities, real estate, venture capital, and more are now within reach. Alternative investments can be high risk, so it's important to consider your portfolio goals and risk tolerance to determine if they're right for you.

FAQ

How would earnings from real estate crowdfunding be taxed?

Owing to the complexity of real estate-related tax rules, you may want to consult a professional. Crowdfunded real estate investments can produce income in the form of dividends or interest, both of which are taxable at the dividend rate. Generally, any profits you clear when exiting would be treated as capital gains, and the holding period determines whether the short- or long-term rate applies.

Would real estate crowdfunding be considered a high-risk investment?

Real estate crowdfunding is risky, as interest rate fluctuations or changing market and economic conditions can affect outcomes. If you’re weighing real estate vs. stocks, remember that the two have little correlation to one another. Holding real estate in a portfolio can help balance risk and provide some protection against market volatility.

What is the difference between an accredited and nonaccredited investor?

An accredited investor satisfies one of three requirements established by the SEC, based on net worth, income, or securities licenses they hold. A nonaccredited investor does not meet these requirements and is generally considered a retail investor. A nonaccredited investor is subject to limits on how they may invest in crowdfunding opportunities.

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