Money market instruments are one of the low-risk and short-term financial market investments that anyone including the government, corporations, large organizations, small businesses, and individual investors put money to work.
To start exploring the money market. First, you need to know what the money market is all about and if you can invest in this section of the financial market.
What is the Money market All about?
By simple definition, the money market is referred to a portion of the financial market, where instruments with high liquidity and short-term maturities are traded. This simply means participants can lend and borrow, in the money market investor buy and sell financial securities that have a short-term maturity, that comes with an average of one year or less.
The money market remains one of the safest places to invest due to the high liquidity of securities and short maturities, this market funds seek stability and security to never lose money and keep net asset value.
Instruments traded in the money market are Treasury bills, commercial paper, federal funds, bills of exchange, certificates of deposit, short-term mortgage-backed securities, and asset-backed securities.
Oftentimes big corporations with short-term cash flow needs do borrow directly from the market through their dealer, the small companies with excess cash can borrow through money market mutual funds and individual investors who are looking to profit can invest through the same market mutual funds or money market bank account.
Functions of the Market
The money market brings stability and development to the country’s economy because its short-term liquidity is given to the governments, commercial banks, and other big organizations. Plus Investors with excess money looking to profit, below are the main functions of the market you need to know.
1. Financing Trade
The market makes funds available for the country in numerous units of the economy, such as agriculture and small-scale industries and it makes it possible to finance the local and international traders, who may need urgent short-term funds.
It delivers a facility to discount bills of exchange for traders and this provides instant financing to pay for goods and services.
2. Growth of Industries
The market allows businesses to have an access to short-term loans to finance their working capital needs, many things may spring up, and sometimes high volume transactions bring businesses to experience cash shortages.
Commercial paper and finance bills can be obtained by businesses on a short-term basis to boost up operation, money market made it possible.
3. Central Bank Policies
This market helps the Central bank to develop an appropriate interest rate, it also makes it possible to give a boost to other sub-markets so that the monetary policy objectives of the Central bank get effective to ensure a healthy financial system.
It gives the central bank ahead up to perform its policy-making function efficiently
4. Commercial Banks Needs Help
The money market stands as a market for the commercial banks that are ready to invest their excess reserves and earn interest while maintaining liquidity. Short-term investments, such as bills of exchange, can easily be converted to cash to support customer withdrawals.
Commercial banks when faced with liquidity problems, can borrow from the money market on a short-term basis without going to the central bank.
The central bank charges a higher interest rate in the short term than the money market so the commercial banks seize this advantage.
Types of Instruments Traded in the Market
This market has several financial instruments for short-term lending and borrowing, are the five created and well known traded instruments in the money market
- Treasury Bills
- Certificate of Deposit (CD)
- Commercial Paper
- Banker’s Acceptance
- Repurchase Agreements
Why is the market important?
The market is important to make the modern financial economy get smoother. The savers can lend money to those in need of short-term loans.
Since loans are needed by governments, corporations, and banks to meet their immediate or near-term responsibilities or regulatory requirements and individuals with excess cash on hand to earn interest it makes everything work fine.
Can I lose money In The Market?
The market instruments are low risk, there is no chance you will lose your money by owning a CD or T-bill either. It is insured by FDI, so your money is safe.
What are the downsides of this market?
You will not make a higher gain on money market investments because they are virtually risk-free, so it often comes with very low interest rates. This is to say they will not provide substantial capital gains or investment growth.
Your investment account like CDs may be locked up until maturity, which can range from months to years.
How can I invest in the money market as an individual?
If you don’t know you can participate in the money market as an individual you are missing out, you can invest through buying money market funds, short-term certificates of deposit (CDs), municipal notes, or through Treasury bills.
This market has retail locations for individual investors, the local banks are one the place to start in the market, brokers, and other online ventures are not left out.