What Is a Money Market?

A money market is one component of the fixed income market, which is where fixed income securities are traded. Investments made to money markets are usually known as cash investments, because the maturity time of the security is usually less than one year. Put simply, a money market is the financial market around the globe where borrowing and lending are done on a short term basis, and this market includes several different types of securities that are traded. Money markets are made up of banks, governments, and other entities that borrow and lend money for short term purposes, usually three to twelve months.

There are several types of instruments that are traded on American money markets, and many global money markets as well. These can include Certificates of Deposit, usually called CDs, banker’s acceptance drafts which are similar to cashiers checks, short term securities that are issued by federal government agencies, repurchase agreements which are normally only held for between one day and two weeks, federal funds available for lending institutions to borrow, commercial papers which are basically promissory notes that are not secured, Treasury bills, money market mutual funds, municipal notes, and others.

Securities that are traded on a money market are generally promissory notes and IOUs that have been issued by financial institutions, lending institutions, large corporations, and governments. These securities are considered much safer and more stable than other investments, because they are extremely liquid, and they are safe because the securities are almost guaranteed to return the principal on the investment, along with interest payments until the security matures. These securities are very conservative, however, which is what makes them less risky, but this also means returns are much lower. Money markets do not usually have high levels of volatility, and many traders choose these securities to make up a percentage of their portfolio simply because they are such a safe investment. The federal government is not going to default and fail to pay their debts, and neither will almost all other entities that have securities traded on the money market.

Money markets can be a terrific way for investors to have a stable and secure investment which pays a low return but has virtually no risk of losing money. A lot of retirement and pension plans use money markets to invest retirement and pension funds. The money market is different from the the stock market in some important ways. Money market investments can require high amounts and denominations, unlike the stock market where penny stocks can be found for less than a dollar a share. There is no trading floor or exchanges for the money market, because trading is done electronically and through the phone system. This is one reason a money market is termed a dealers market, and another is the fact that firms buy, sell, and trade securities in their own specific company accounts and at their own risk. In the stock market, brokers get a commission for acting as the agent for the investor, while the investor takes all of the risks of a loss.

A few money market securities, including Treasury bills, can be bought directly, but most of the time individuals can invest in money markets by using money market mutual funds or money market bank accounts. These two options take the assets of many investors and pool them together, so that money market securities can be purchased without a single investor having to raise large amounts of money. The different instruments and securities that are traded on these markets will vary on the rate of return and the risks involved, but they are generally viewed as a lower risk lower return alternative to other markets that can be more volatile.

The information supplied in this article is not to be considered as medical advice and is for educational purposes only.