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Money Market Vs Stock Market

PUBLISHED Jul 24, 2022, 4:54:40 PM        SHARE

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Some folks have asked Piggy whether to start off by investing on the money market or stock market. The fact about the matter is that these are two asset classes with different characteristics. A money market instrument is characterized by fixed income instruments. The risk associated with money market instruments such as Treasury Bills is low and income is provided in the form of interest. When the income is reinvested, it will lead to an increase in capital value. While the risk is low, it is important that one should understand that money market funds do not offer any form of guarantee. Also linked to the money market are Bonds, that are medium to long-term investment instruments. Bonds offer a guaranteed stream of interest income and capital growth is possible if the price of the bond strengthens, which will potentially happen when interest rates drop. The risk associated with bonds is medium.

On the other hand, the stock or equities market involves the investment in shares which are long term investment instruments. Shares or stocks tend to provide better potential for capital growth than cash and bonds over the long term. Income is derived from dividends while it also depends on an increase in the price of the share, which of course is also not guaranteed. This is what makes an investment in equities a medium to high risk investment.

risk flow chart

The decision on whether to invest on the money market or stock market lies in the specific investment objectives as well as risk profile of the investor. It is generally recommended to invest short term funds on the Money Market whilst long term money can directed to the Stock Market. All in all, the differences in characteristics is to the advantage of an investor given that there is scope to include all asset classes in a single portfolio thereby helping in terms of diversification.

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Originally Posted on piggybankadvisor.com


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