It’s a component of economics which provide funds or investment like borrowing, buying, selling, and lending in very short amount of time. When we talk about money market, it mostly involve liquid assets which convert assets into hard cash very quickly without losing its market value. Liquid asset involve such as cash or currency, bank account, account receivable and mutual funds etc.
As an individual, they can get profit form money market through their bank account or mutual fund. Professional person can help to buy money market securities on behalf of an individual investors.
How it Works?
It’s important to understand how money market contributes to the economic stability and development of the country. Here are the main functions of it.
It can provides funds to local or international traders who needs short-term loans or funds in urgent. This also makes financing available for other units of economy such as agriculture and small scale industries.
2.Central Bank Policies:
Since central bank take responsible for sustaining and maintaining of country healthy financial system by guiding proper policies which can perform its policy-making function efficiently through money market such as short term interest rates.
3.Growth of Industries:
With the growth of new industries around the country it’s important for those industries to meet proper financial support which can be obtain through money market. Even though it do not provide long term funds but it influences the capital market.
4.Commercial Banks Self-Sufficiency:
People withdrawing money from their bank are mostly coming from money market such as bills of exchange while maintaining liquidity. Also, any problem related to liquidity, they can borrow money from money market as alternative rather than central bank charging less interest rates.
Instruments Traded in the Money Market
Treasury bills or T-Bills are issued by the government promissory note with guaranteed repayment at a later date and it is considered as one of the safest instrument. Also they are sold at a discount to their face value with only interest rate difference and mostly purchase my banks, broker, individual investors, pension funds, insurance companies, and other large institutions.
2.Certificate of Deposit(CD):
Bigger deposits and longer the terms gives higher interest rates depending on the volume of deposit. But for short term say three to five month, the rates offered remain constant and there is a penalty for withdrawing prior to the time of maturity.
It’s a market of buying and selling of unsecured loan to finance short-term cash flow. It is also considered as safe investment because only institution with high credit rating can issue it.
Individual investors can invest in the commercial paper indirectly through money market funds.
It’s a short term loan that is issued by a firm but guaranteed by a bank. Often used in international trade because it benefits to both the drawer and bearer. Or it can be sell it on secondary market profiting investors.
Repurchase agreements or repo is as short term of borrowing money market security with an agreement to repurchase it at higher price on later date.