What is a Money Market
I'm sure you've asked the question: "What is a money market?" Well, in
essence, the money market is simply a virtual monetary exchange for
large entities (like corporations and government) to facilitate their
short-term cash needs. The money market allows these entities to keep
large sums of money in very liquid investments that allow them to earn a
tidy return without tying their money up for long periods of time.
In some ways, the money market falls under the category of bonds, or
fixed income. As we know, bonds are simply IOU's issued by corporate or
government entities to a bondholder with a promise to return the money
paid by the bondholder at a certain maturity date with a specified rate
of interest attached. These bond maturity dates range anywhere from one
year to thirty years (sometimes more). The securities that make up the
money market, however, mature in less than one year. As a result, they
are very safe and secure investments, and for this reason they are also
known as cash investments. Consequently, because of their relative
safety in even an incredibly volatile market, money market securities
provide a relatively low return.
The one thing that most investors should understand is that the money
market trades its securities in very high denominations (frequently
$100,000 or more) which generally limits the access of money market
securities to large corporate or government investors with large sums of
money to invest. Smaller investors, such as those in retirement plans,
can gain access to the security and liquidity of a money market through
a money market mutual fund or through a money market savings account
through a bank. This is true because the money of an individual investor
is pooled with the money of many other individual investors by a mutual
fund or a bank, which then takes that large sum of money and purchases
the securities that make up the money market.
But what exactly are those securities that make up the money market? In
the following sections, I'll discuss a few of the typical securities
that make up the money market.
Hopefully, I've answered the "What is a money market" question.
Table of Contents
Money Market: Introduction
- What is a Money Market?
- Treasury Bill (T-Bill)
- Certificate of Deposit (CD)
- Commercial Paper
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