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 If money is withdrawn on short notice, the banking institution will experience a shortage of funds.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. What are the typical durations for a certificate of deposit?

    Investing in a certificate of deposit offers individuals the ability to earn interest on idle funds with less risk than stock ... Read Answer >>
  2. Are money market accounts for short-term investments a good idea?

    Learn whether money market accounts are good ideas for short-term investments. Money market accounts combine aspects of a ... Read Answer >>
  3. What is considered a good interest rate for a certificate of deposit (CD)?

    Explore the various options available with certificates of deposit and discover how to find the most lucrative rates for ... Read Answer >>
  4. Is a money market account the same as a money market fund?

    Discover the differences between money market accounts and money market funds, including minimum balance requirements, withdrawal ... Read Answer >>
  5. Can certificates of deposit (CDs) lose value?

    CDs are FDIC insured, so they do not lose face value, though broker-issued CD accounts do carry risks. Read Answer >>
Related Articles
  1. Investing

    Certificate of Deposit (CD)

    A certificate of deposit, or CD, is a common financial product sold by banks, thrift organizations and credit unions. This type of product is often called a time deposit. CDs are insured up to ...
  2. Investing

    Are CDs Good Protection For The Bear Market?

    Certificates of deposit promise stable income in any market, but do they deliver?
  3. Investing

    Why Money Market Funds Break The Buck

    These funds are noted for their safety in a rough market. Read on to find out why.
  4. Personal Finance

    The 7 Best Places To Put Your Savings

    You work hard to put your money away for the future, but where you should you keep it?
  5. Investing

    How To Earn The Most From CDs When Interest Rates Are Low

    Certificates of deposit might not seem like a good place to keep your money when interest rates are low, but they do offer security and stability. And with laddering and studying promotional ...
RELATED TERMS
  1. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. ...
  2. Term Deposit

    A deposit held at a financial institution that has a fixed term, ...
  3. Bull CD

    A certificate of deposit whose interest rate fluctuates in direct ...
  4. Promotional CD rate (Bonus CD rate)

    A limited-time offer of a higher rate of return on a certificate ...
  5. Zero-Coupon Certificate Of Deposit (CD)

    A certificate of deposit (CD) that is purchased at a largely ...
  6. Money Market Fund

    An investment fund that holds the objective to earn interest ...
Hot Definitions
  1. Price Elasticity Of Demand

    A measure of the relationship between a change in the quantity demanded of a particular good and a change in its price. Price ...
  2. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying ...
  3. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Down Round

    A round of financing where investors purchase stock from a company at a lower valuation than the valuation placed upon the ...
  6. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
Trading Center