Loading the player...

What is a 'Money Market'

The money market is where financial instruments with high liquidity and very short maturities are traded. It is used by participants as a means for borrowing and lending in the short term, with maturities that usually range from overnight to just under a year. Among the most common money market instruments are eurodollar deposits, negotiable certificates of deposit (CDs), bankers acceptances, U.S. Treasury bills, commercial paper, municipal notes, federal funds and repurchase agreements (repos).

BREAKING DOWN 'Money Market'

Money market transactions are wholesale, meaning that they are for large denominations and take place between financial institutions and companies rather than individuals. Money market funds offer individuals the opportunity to invest smaller amounts in these assets.

Market Participants

Institutions that participate in the money market include banks that lend to one another and to large companies in the eurocurrency and time deposit markets; companies that raise money by selling commercial paper into the market, which can be bought by other companies or funds; and investors who purchase bank CDs as a safe place to park money in the short term.

The U.S. government issues Treasury bills in the money market, and the bills have maturities that range from a few days to one year. Only primary dealers can buy them directly from the government; dealers trade them between themselves and sell retail amounts to individual investors. State, county and municipal governments also issue short term notes.

Commercial paper is a popular borrowing mechanism because it is exempt from SEC registration requirements. It's attractive to corporate investors because rates are higher than for bank time deposits or Treasury bills, and a range of maturities is available, from overnight to 270 days. However, the risk of default is significantly higher for commercial paper than for bank or government instruments.

Money Market Funds

The money market itself is limited to companies and financial institutions that lend and borrow wholesale amounts, which range from $5 million to well over a billion dollars per transaction. Mutual funds offer baskets of these instruments, which are generally considered to be safe, to individual investors. The net asset value (NAV) of such funds is intended to stay at $1, but during the 2008 financial crisis, one fund fell below that level. That triggered market panic and a mass exodus from the funds, which ultimately led to restrictions on them holding higher-yielding investments in order to raise returns.

Capital Market

The money market is different from the capital market, which is the sale and purchase of long-term debt and equity instruments. A discussion of the differences between the two markets is available in the articles Financial Markets: Capital Vs. Money Market and Getting to Know the Money Market.

RELATED TERMS
  1. Money Market Yield

    The interest rate earned by investing in securities with high ...
  2. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, ...
  3. Cash Equivalents

    Investment securities that are short-term, have high credit quality ...
  4. Near Money

    An economics term describing non-cash assets that are highly ...
  5. Term Deposit

    A deposit held at a financial institution that has a fixed term, ...
  6. Capital Markets

    Capital markets are markets for buying and selling equity and ...
Related Articles
  1. Investing

    Financial Markets: Capital vs. Money Markets

    Financial instruments with high liquidity and short maturities trade in money markets. Long-term assets trade in the capital markets.
  2. Investing

    Introduction To Commercial Paper

    Commercial paper is a short-term instrument that can be a viable alternative for retail fixed-income investors looking for a better rate of return on their money.
  3. Investing

    Financial Markets: Capital vs. Money Markets

    Find out the similarities and differences between these two commonly used components of the financial markets.
  4. Personal Finance

    The 7 Best Places to Put Your Savings

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

    The Pros And Cons Of Money Market Funds

    Find out whether stocking your money in these accounts will stand up to the test of time.
  6. Investing

    Do Money-Market Funds Pay?

    This investment provides security, but its returns may not be adequate for long-term investors.
  7. Investing

    Introduction To Money Market Mutual Funds

    Learn about the easiest way to benefit from money market securities.
RELATED FAQS
  1. What are some examples of money market funds?

    Learn more about different types of money market mutual funds, including those that invest in government paper versus commercial ... Read Answer >>
  2. What are some examples of securities that can be found in a money market fund?

    Learn about examples of securities found in money market accounts. These securities need to be safe, liquid and of short-term ... Read Answer >>
  3. What determines the interest rate in my money market account?

    Placing funds in a money market account may provide a higher interest rate than a savings account due to the underlying securities ... Read Answer >>
  4. Can retail investors buy commercial paper?

    Find out whether retail investors buy commercial paper, and learn about the restrictions that often prevent individual investors ... Read Answer >>
  5. Are money market funds considered cash?

    Learn the difference between how analysts and auditors treat money market funds and why not knowing the difference can hurt ... Read Answer >>
  6. How do I calculate a bond's modified duration using Excel?

    Understand the benefits of investing in a money market mutual fund, and learn why investors use this type of account in volatile ... Read Answer >>
Hot Definitions
  1. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  2. Pro-Rata

    Used to describe a proportionate allocation. A method of assigning an amount to a fraction, according to its share of the ...
  3. Private Placement

    The sale of securities to a relatively small number of select investors as a way of raising capital.
  4. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  5. Backward Integration

    A form of vertical integration that involves the purchase of suppliers. Companies will pursue backward integration when it ...
  6. Pari-passu

    A Latin phrase meaning "equal footing" that describes situations where two or more assets, securities, creditors or obligations ...
Trading Center