What is "hot money"?

By Chizoba Morah AAA
A:

"Hot money" refers to funds that are controlled by investors who actively seek short-term returns. These investors scan the market for short-term, high interest rate investment opportunities. A typical short-term investment opportunity that attracts "hot money" is the certificate of deposit (CD).

Banks usually attract "hot money" by offering relatively short-term certificates of deposit that have above-average interest rates. As soon as the institution reduces interest rates or another institution offers higher rates, investors with "hot money" withdraw their funds and move them to another institution with higher rates.

The "hot money" concept is not reserved solely for banks. Investors can move their funds to different countries to take advantage of favorable interest rates.

"Hot money" can have economic and financial repercussions on countries and banks, however. When money is injected into a country, the exchange rate for the country gaining the money strengthens, while the exchange rate for the country losing the money weakens. If money is withdrawn on short notice, the banking institution will experience a shortage of funds.

To read more about CDs, see Step Up Your Income With A CD Ladder.

This question was answered by Chizoba Morah.

RELATED FAQS

  1. Besides a savings account, where is the safest place to keep my money?

    Savings accounts are safe because investors' deposits are guaranteed by the Federal Deposit Insurance Corporation (FDIC) ...
  2. How do open market operations affect the U.S. money supply?

    Formulating a country's monetary policy is extremely important when it comes to promoting sustainable economic growth. More ...
  3. If a client has a very low risk tolerance, all of the following might be suitable ...

    If a client has a very low risk tolerance, all of the following might be suitable investments EXCEPT: a. Growth stock fundsb. ...
  4. The interest rate used to define the “risk-free” rate of return is the

    a. discount rate.b. 90-day Treasury bill rate.c. five-year Treasury note rate.d. federal funds rate. Answers: bThe 90-day ...
RELATED TERMS
  1. Treasury Yield

    The return on investment, expressed as a percentage, on the debt ...
  2. Money Market Account

    An interest-bearing account that typically pays a higher interest ...
  3. Money Market Fund

    An investment fund that holds the objective to earn interest ...
  4. Retirement Money Market Account

    A money market account that an individual holds within a retirement ...
  5. United States Treasury Money Mutual Funds

    An investment fund that pools money from investors to purchase ...
  6. Canadian Depository For Securities Limited - CDS

    Canada's national securities depository, clearing and settlement ...
Related Articles
  1. The Treasury And The Federal Reserve
    Bonds & Fixed Income

    The Treasury And The Federal Reserve

  2. Introduction To Commercial Paper
    Bonds & Fixed Income

    Introduction To Commercial Paper

  3. Can High Fund Returns Be Deceiving?
    Mutual Funds & ETFs

    Can High Fund Returns Be Deceiving?

  4. Money Market Funds: Enough Regulation ...
    Investing News

    Money Market Funds: Enough Regulation ...

  5. Introduction To Retirement Money Market ...
    Retirement

    Introduction To Retirement Money Market ...

Trading Center