5 Things You Must Know About Market Money

Introduction

A money market is a component of the financial market for assets. It is mainly involved with short-term borrowing and lending with original maturities ranging over one year or shorter time frames. In this particular market only financial instruments with high liquidity are exchanged. The instruments traded include treasury bills, commercial paper, banker's acceptance certificates of deposits, federal funds and short-lived mortgage or securities that have been backed up with assets.

History

The first market money fund was established in the US in 1971. Named the Reserve Fund it was offered to investors in the market who were only interested in investing and getting only a small profit in return. Several such funds were set up during the same time to facilitate this profitable market of money. But since then the market has undergone rapid transformations and has widely affected the currency markets as well. It has since then been exploited by corporations worldwide and is perceived as one of the biggest causes of inflation. A single U.S. dollar in 1990 was equivalent to US$ 24 in 2000. The inflation rate during the stated period of time was extremely high and coincidentally it was during this period that money markets saw rapid booms.

Features

The money market is mainly used by participants for borrowing and short-term lending. The time period can range from several days to under a year. Due to the highly liquid nature of securities and the short maturities money market is perceived to be quite a safe place to invest your money in. And its main purpose is that it provides liquidity to the global financial system. Participants can use it in a variety of ways both in the short and long terms. Although thought to be a very safe arena for putting your money there are apparent risks that all the investors need to be made aware of including risks of securities becoming defaulted such as commercial paper. It provides a medium through which demand and supply for short-term funds are matched hence allowing the financial institutions to meet their own short-term demand for money on an emergency basis. It also allows the central bank to influence the liquidity available in the banks and hence control the interest rates of the economy. It alsohelps institutions which possess cash and these entities can lend the cash to borrowers and then use the fund to earn interest on the idle funds. By matching the requirements of lenders with the borrowers it also allows the short-term interest rates to be kept under control.

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