Investors with a lower risk tolerance are always on the lookout for investments options that can offer them good returns while maintaining the liquidity of their funds. Also, most investors tend to compare the returns on their debt fund investments with bank deposits. Money Market has been a preferred option among short-term debt investments. Now we will let you know some facts about what is money market.
1. What is a Money Market?
The money market refers to trading in very short-term debt investments. at the wholesale level, it involves large-volume trades between institutions and traders. At the retail level, it includes money market mutual funds bought by individual investors and money market accounts opened by bank customers. In all of these cases, the money market is characterized by a high degree of safety and relatively low rates of return. It involves the purchase and sale of large volumes of very short-term debt products, such as overnight reserves or commercial paper. An individual can invest in the money market by purchasing a money market mutual fund, buying a Treasury bill, or opening a money market account at a bank.
2. What is the concept of a Money Market?
It is one of the pillars of the global financial system. It involves overnight swaps of vast amounts of money between banks and the U.S government. Most of the money market transactions are wholesale transactions that take place between financial institutions and companies. Institutions that participate in the money market include banks that lend to one another and large companies in the eurocurrency and time deposit markets; companies that increase money by selling commercial paper into the market, which can be bought by other companies or funds; and investors who purchase bank certificates of deposits as a safe place to park money in the short term. In the wholesale market, commercial paper is a popular borrowing mechanism because the interest rates are higher than for bank time deposits or Treasury bills, and a greater range of maturities is available, from overnight to 270 days. On the other hand, Individuals can invest in the money market by buying money market funds, short-term certificates of deposit (CDs), municipal notes or U.S treasury bills. The U.S government issues treasury bills in the money market, with maturities ranging from a few days to one year. Primary dealers purchase them in huge amounts from the government to trade between themselves or to sell to individual investors. Individual investors can purchase them directly from the government through its TreasuryDirect website or a bank or a broker.
3. Why is the money market important?
It is crucial for the smooth functioning of a modern financial economy. It allows savers to lend money to those in need of short-term loans and allocates capital towards its most productive use. Such loans often made overnight or for a matter of days or weeks, are needed by governments, corporations, and banks to meet their near-term obligations or regulatory requirements. At the same time, it allows those with excess cash on hand to earn interest.
4. What are some examples of money market instruments?
The money market instruments are composed of several types of securities including short-term Treasuries, certificates of deposit (CDs), commercial paper, repurchase agreements (repos), and money market mutual funds that invest in these instruments. The money market funds typically have shares that are always priced at one dollar.
