Money Market - Explained
What is a Money Market?
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Table of ContentsWhat is a Money Market?How Does a Money Market Work?Market ParticipantsMoney Market FundsMoney Market vs. Capital MarketMoney Market AccountsMoney Market Accounts Vs. Savings Accounts Vs. Certificates of Deposit
What is a Money Market?
The money market is a type of market where transactions involving financial vehicles are done. The money market is an organized market where short term securities and financial instruments are traded, these securities are however of high liquidity. The money market is a crucial component of every economy, the common financial instruments traded in the market include commercial paper, repurchase agreements (repos), bankers acceptance, Treasury bills, federal funds and negotiable certificates of deposits (CDs). Borrowers can access short-term funds or loans in the money market, these borrowers include banks, large institutions, and the government.
How Does a Money Market Work?
Generally, the money market is not meant for individuals who need to access short-term funds for personal use, neither is it for small businesses that have little financial needs. Large financial institutions and the government often trade in the money market, this is because the market only allows transactions of huge denominations. Large corporations or organizations or business entities can also trade or access short-term loans in the money market. However, the money market allows individuals or small businesses to invest in the assets, financial instruments of securities available in the money market, the investments can be small-dollar amounts.
Since the transactions that are executed in the money market are wholesale or large transactions, there are institutions that can trade in the market. Large financial institutions or banks that lend money to other banks can participate in the money market. Big companies can also participate in the money market, especially those that generate funds trading commercial papers. The government is another important player o participant in the money market. The money market is a safe and organized market where short term instruments are issued and traded. For instance, in the U.S, the federal government issues Treasury bills which can mature within a few days, weeks or one year.
Money Market Funds
The money market fund is a mutual fund that invests only in short-term securities which are highly liquid. As an open-ended mutual fund, there is a variety of instruments that meet short term needs and have high liquidity such as; eurodollar deposits, banker's acceptances, U.S. Treasury bills, municipal notes, commercial paper, federal funds, certificates of deposits, repurchase agreements and others. The money market funds are generally safe and offer large companies, financial institutions, and the government the opportunity to execute transactions that worth $5million to $1 billion. The money market funds also offer financial instruments or securities that have low risks and have a maturity period of less than a year or 13 months.
Money Market vs. Capital Market
While the money market and the capital market are types of financial market, they are different. The primary difference between the two markets is that short term instruments that have high liquidity are traded in the money market while the capital market offers long term securities. Assets or instruments traded in the money market are held for a period of one year or less but assets and securities traded in the capital market are held for longer periods.
Money Market Accounts
Money market accounts (MMAs) are sometimes called money market deposit accounts (MMDAs). These types of accounts pay interest to account holders, the interest is determined by the current interest rates being used in the money market. MMAs are held in banks or credit unions. Just like a bank account, individual holders can have their debit cards connected to their money market accounts, this means withdrawals can be made form such accounts. Banks make interest credits into this type of account every month, the interest are calculated daily. In the United States, the Federal Deposit Insurance Corporation (FDIC) insures MMAs at banks while the MMAs at credit unions are insured by the National Credit Union Administration (NCUA).
Money Market Accounts Vs. Savings Accounts Vs. Certificates of Deposit
Certain similarities exist between money market accounts, savings accounts and certificates of deposits but there are also some significant differences. Primarily, savings accounts and money market accounts offer high-interest rates but a higher minimum deposit amount is required in money market money, unlike savings accounts. The interest rate of a money market account is also slightly higher than that of a savings account. Certificate of deposits, on the other hand, offer higher interest rates than both savings accounts and money market accounts. Also, the interest rate of a CD remains unchanged during the deposit period, but participants attract a penalty if they make a withdrawal from a CD from its maturity date.