Money markets are a section of the financial markets where money is the key commodity being traded there. The other section of the financial market is the capital market.
Money markets deal with short term credit instruments for the government, financial institutions and other large corporations. In other words, this is where companies and the government go to borrow money to finance their short term investment needs and projects; unlike the capital markets where they go seeking for funds to finance their long term investments.
In addition, companies and other investors may put their money in the money markets as an investment of their cash in the short term when they do not immediately need the cash. This is due to the short maturity period of money market financial instruments which mature between one day and less than one year.
Some of the financial instruments in the money markets include: treasury bills, repurchase agreements, bankers` acceptance, commercial papers, certificates of deposit e.t.c. All these mature within one year and earn relatively low returns as they are considered secure.
Besides being a source of short term financing for the government and companies, the money market has other important functions it plays also:
- It helps the government in short term interest rate regulation;
- It helps the government in the implementation of the monetary policies;
- It helps the government raise funds to bridge its budget deficits.
For a deep and wide analysis of this markets and all its financial instruments, as well as how you can make the best out of it as an individual investor, keep it here on this blog always.