What Is The Money Market? A Brief Guide In 2022

money market

You must have heard the term, financial market. These are one of the most important structures of the economy on which the wealth of the country depends.

The financial market is a physical market where the bonds and financial securities are transacted. The buyers and the sellers meet and trade the financial assets, bonds, and derivatives among themselves.

There are many forms of the financial market. One of the most important of them is the money market. Want to know more about the money market and how it works? Keep reading the article till the end to learn more…

Money Market: What Is It?

One of the most important components of the economy is the money market. These are the components that provide short-term funds to the ones who use them. So it is a type of the financial market.

The main function of the money market is to trade in products that are liquid maturities and are available on a short term basis. Therefore, they have a very high safety degree and also have a lower interest return.

These markets deal in loans that are for a shorter period of time. Generally, the loans in the money market are only for a short period of about a year.

Importance Of Money Market

In the beginning, it was not given so much importance. However, as the minor, previously less important securities started gaining more importance, the money market was included in the mainstream financial market.

The money market has numerous importances. Some of them are stated below:

  • It is needed for the trade and development of industries.
  • It provides short term funds for the businesses.
  • This helps to maintain the smooth working of the central banks.
  • It helps in the working of the commercial banks of the economy.
  • It helps to keep the central banks in check.
  • This helps in the control of global market money.
  • It helps in the formulation of the monetary policies.
  • The money market acts as the indicator of the financial economy of the country.
  • It helps in the development of the capital market by mobilizing the resources.

Instruments Of Money Market

When I say that there are many ways in which you can participate in this market, I mean there are literally more than a single way. So, for example, some of the types of instruments that are a part of the money market are as follows:

1. Money Market Account

money market account

It is one of the most important money market instruments. More popularly called the MMA, these are the special account types that work like savings accounts. However, they offer higher interests when compared to any standard savings account.

The federal or central regulations generally limit withdrawals. The interest is calculated on a daily basis. These accounts are extremely crucial to the calculation of the network that is tangible in nature.

2. Certificates Of Deposit

Certificates Of Deposit

Also known as CDs, the Certificates of Deposit is something that the credit union and the banks offer. The CDs offer a premium rate of interest in exchange for the agreement, which states that the customer or the client has agreed to pay a huge sum of money.

In case you were wondering about the rate of interest, then let me make this clear. That interest that you get from the Certificates of Deposit is much higher than those that the money market accounts pay.

3. Eurodollars

Eurodollars

As the name suggests, this instrument and the deposit is the kind that the dollar dominates. These are made in the United States at several banks. Sometimes, the branches of the banks can be located outside the U.S. as well.

These are not subjected to federal regulations. Eurodollars are one of the biggest capital markets in the world.

4. Commercial Paper

Commercial Paper

When you buy or sell loans that are not secured for the organizations or corporations, they fall under the commercial paper instrument of the money market. They are like short-term instruments. These play a major role in making the credit score high.

In other words, the commercial paper is the promissory notes that the companies issue that you can redeem at face value.

5. Money Market Funds

Money Market Funds

This is a kind of mutual fund that deals with the investments made by financial institutions and companies. It deals with highly liquid instruments like cash. So it is more like an investment that the investment company or funds sponsor.

The main aim of the money market funds is to make sure that they can offer the investors liquidity that is high in exchange for low risk. Therefore, they are also known as the money market mutual funds.

Frequently Asked Questions (FAQs):

1. What Is Money Market?

The purchase and the selling of money in large amounts in a short span of time is called the money market. These exchanges can be made through commercial papers and overnight reserves.

2. How Does The Money Market Work?

If you are looking for the ways in which this market works, then you have found the destination.

This is a wholesale market where the companies and the financial institutions exchange money. This constant flow of money from one institution to another is the basic way in which it works.

3. Why Is The Money Market Called So?

It is known as the money market because there are many reasons why this market is considered to be the equivalent of cash.

This market is extremely safe and liquid in character. These are for short-term loans, ledging, and borrowing.

And That’s A Wrap!

It is a component of the financial market. It is important in the working of the economy. They profite short term funds to the companies of financial organizations in the face of emergencies. The working of the money market plays an important role in the flow of capital in the economy.

There are many types of money market instruments. Some of the most common among them are eurodollars, money market funds, money market account or MMA, Certificates of Deposit or CDs, and the commercial paper.

This is important as they make sure that trade and commerce are maintained in the country. The interests that are provided in this market are subject to change. While the rate of interest is high when it comes to the CDs, they are comparatively less when it comes to the Money Market Accounts.

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