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Explaining the Money Market

Aug 17, 2007
The Money Market is the financial market for short-term borrowing and lending, usually up to a time span of thirteen months. This contrasts with the capital market for longer-term funds that feature within the Market.

This is the place where banks lend to and borrow from each other, short-term financial instruments, for instance certificates of deposit or enter into agreements, repurchase agreements are taken place.

It provides short to medium term liquidity aspect element within the global financial system. Money Market derivatives include forward rate agreements and short-term interest rate futures.

The Market is a subsection of the fixed income market. We usually think of the term fixed income as being synonymous to bonds. In reality, a bond is just one sort of fixed income security.

The difference between the Money Market and the bond market is that the money market specializes in very short-term debt securities that is debts that mature in less than one year time span. Money investments can also be termed as the cash investments because of their short maturities.

Money Market securities are essentially IOUs issued by governments, financial institutions and large corporations. These instruments are very liquid and are considered unusually safe. As they are extremely conservative, Money Market securities offer significantly lower returns than most other securities.

Comparing the Money Market with the Stock market

The major difference between the Money Market and the stock market is that most Money Market securities trade in very high denominations. This, in turn restricts access for the individual investor.

Furthermore, the Money Market is also a dealer market, which means that firms buy and sell securities in their own accounts, at their own risk. Comparing this to the stock market where a broker receives commission to act as an agent, while the investor takes the risk of holding the stock.

Another characteristic of a dealer market is the lack of a central trading floor or exchange. Deals are transacted over the phone or through the use of electronic systems.

These accounts and funds pool together the assets of thousands of investors in order to buy the securities on their behalf. However, some Money Market instruments like the Treasury bills can be purchased directly and if you fail to acquire that, they can be acquired through other large financial institutions with direct access to these types of markets.

Understanding the Money Market better

There are tons of different instruments within the markets that are offering various returns at various risks, which is an aspect element within the sections that take a look at the major Money Market instruments.

Also a better-known place for large institutions and government to manage their short-term cash needs is the Money Market. However, individual investors have access to the market through a variety of different securities.

These types of markets specialize in debt securities that mostly mature in less than one year. These securities are very liquid, and are considered very safe and as a result, they often offer a lower return than other securities. The easiest way for consumers to gain access to the Money Market is through a mutual fund.

Some terms that are used in the this markets are the T-bills, which are short-term government securities that mature in one year or less from their issue date and are considered to be one of the leading safest investments - they do not provide a fantastic return.

Another term that is used in the Money Market is a certificate of deposit, which is a time deposit with a bank. Annual percentage yield takes into account compound interest, annual percentage rate does not.

Certificate Deposits are safe, but the returns aren't wonderful, and your money is tied up for the length of the deposit. Commercial paper is an unsecured, short-term loan issued by a corporation. In the Money Market returns are higher than T-bills because of the higher default risk.

The banker's acceptances are negotiable time draft for financing transactions in goods. They are new in international trade and are commonly only available to individuals through the funds.

The Eurodollars are U.S. dollar-denominated deposit at banks outside of the United States. The average Eurodollar deposit is very large and the only way for consumers to invest in this market is indirectly through a Money Market fund.

Hence, we can now understand that a Money Market can surely make a difference in the financial matters of a country.
About the Author
William Smith the author provides much more financial information on many subjects as well as the secret to his success in the market along with 5 Free power stock picks emailed daily so grab your Free subscription on his website at Money Market (All is Free)
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