he Money market researched and how it operates
The money market developed because there are parties that had surplus funds, while others needed cash. The money market is a sector of the financial market in which financial instruments with high liquidity and very short maturities are traded. Money market investments are also called cash investments. Money market trades can happen overnight, in a couple of short months or in less than a year. Money market trades in financial instruments commonly called "paper”, there are various instruments that exist such as Treasury bills, commercial paper, bankers' acceptances, deposits, certificates of deposit, bills of exchange, repurchase agreements, federal funds, and short-lived mortgage, and asset-backed securities. This contrasts with the capital market for longer-term funding, which is supplied by bonds and equity.
These instruments are very liquid and considered extraordinarily safe. Because they are extremely conservative, money market securities offer significantly lower returns than most other securities. One of the main differences between the money market and the stock market is that most money market securities trade in very high denominations. This limits access for the individual investor. Furthermore, the money market is a dealer market, which means that firms buy and sell securities in their own accounts, at their own risk. Deals are transacted over the phone or through electronic systems.
The money market is better known as a place for large institutions and government to manage their short-term cash needs such as raising funds, helping to implement monetary policy, determining short-term interest rates. However, individual investors have access to the market through a variety of different securities and the easiest way for us to gain access to the money market is with money market mutual funds, or sometimes through a money market bank account. These accounts and funds pool together the assets of thousands of investors in order to buy the money market securities on their behalf.
A couple examples of these instruments are listed below:
Certificate of deposit - Time deposit, commonly offered to consumers by banks, thrift institutions, and credit unions.
Repurchase agreements - Short-term loans—normally for less than two weeks and frequently for one day—arranged by selling securities to an investor with an agreement to repurchase them at a fixed price on a fixed date.
Commercial paper - short term promissory notes issued by company at discount to face value and redeemed at face value
Interest-bearing deposits held by banks and other depository institutions at the Federal Reserve; these are immediately available funds that institutions borrow or lend, usually on an overnight basis. They are lent for the federal funds rate.
Treasury bills - Short-term debt obligations of a national government that are issued to mature in three to twelve months.
Money funds - Pooled short maturity, high quality investments which buy money market securities on behalf of retail or institutional investors.
Foreign Exchange Swaps - Exchanging a set of currencies in spot date and the reversal of the exchange of currencies at a predetermined time in the future.
Short-lived mortgage- and asset-backed securities
Who uses the money market?
The money market consists of financial institutions and dealers in money or credit who wish to either borrow or lend therefore their main players involved are the Reserve Bank of Australia, banks, superannuation funds, insurance companies, investment trusts, investment banks, building societies, retail and institutional money market funds, large corporations and individual participants.
The money market is important for all types of businesses (especially small businesses) because it offers opportunities to companies that have some spare cash at hand to invest in short-term securities. At the same time money market also...
References: Wiki Pedia - Frank J. Fabozzi, Steve V. Mann, Moorad Choudhry, The Global Money Markets, Wiley Finance, Wiley & Sons (2002), ISBN 0-471-22093-0, Money Market, Investopedia. Foreign Trade and the Money Market, Felix Schuster, 1903. Bill of Exchange, Encyclopaedia Britannica, 1911. Money Market and Money Market Instruments, Functions and importance of Money Market, Discount Instrument, riskglossary.com, accessed 2012-05-14.
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