You may hear the term Money Market before but do you know what does it mean? If not, then you are at the right place. In this blog, you will come across the concept of the money market and its purposes. It is the organized process of exchange in which participants can lend and borrow a huge amount of money for a specific period. Whereas, it is considered one of the most efficient arenas for government, businesses, and other big institutions to use the money. It also provides a significant service to individuals who are interested to invest the small amounts sagely.
Purpose Of The Money Market
There is different kind of money market instrument in this current era, each one of them has their benefits. Let’s have a look at the purposes of the money market:
People these days are very much interested to invest money for the same reason businesses do investment that is to earn profit or gain. Therefore, if you have some amount of money that you do not need currently then it is a good idea to invest through purchasing long-term investments. Because that is how you can easily secure the interest on the amount. On the other hand, this is not the case if you choose to hold money because you will be bearing the opportunity cost of holding a currency that is the time value of money.
The money market allows you to draw an investor towards a short-term money market that offers safe and highly liquidate instruments. All the instruments have a maturity date that varies from a day to one year. It is not necessarily important to hold these securities for a longer period as these are connected with active trading in secondary markets.
Such securities trade happens in the secondary market that has no centralized location. There is no need to be physically present for trading securities, as one can trade from anywhere through the internet or telephone. It is important to have a clear understanding and experience to participate in this market for the investor.
Some main types of the money market can be found on any yahoo finance, or Google finance website. Each financial instrument is made for the purposed of short-term lending and borrowing. Most of them are quite specialized in that they are only traded by experienced parties such as large financial institutions and banks.
Types of Money Market Instruments
A large number of financial instruments have been created for short-term lending and borrowing. Many of these money market instruments are quite specialized, and they are typically traded only by those with intimate knowledge of the money market, such as banks and large financial institutions. Some of them are the discount window, federal funds, Eurodollar time deposits, negotiable certificates of deposits, stocks, and so on. Let’s have a closer look at Short term investment pools:
Short-Term Investment Pools
STIPs include local government investment pools, money market mutual funds, and short-term investment funds that are sold as shares in the huge pool of money market instruments. One can consider the variety of money market products into one specific product for the individual investor.