What is the money market?

The financial market is made up of several sub-categories like capital market, derivatives market, commodity market, foreign exchange market and spot market. The money market is another sub-sector that is less-known to most retail investors.

So, what does the money market mean? 

The money market definition refers to trading in very short-term debt instruments in the financial market. It is characterised by a high degree of safety and a relatively low return in interest. Trading in money markets is done over the counter and is wholesale.

There are several money market instruments available, including, among others, commercial paper, treasury bills, certificates of deposit (CD), bills of exchange, repurchase agreements, and short-lived asset-backed- and mortgage-backed securities. The instruments bear differing structures, credit risks, maturities, and currencies.

The money market is dominated by big investment firms and banks. Retail investors can participate by buying money market funds from these investment firms. 

Where have you heard of the money market?

You may have heard of the money market from various sources. For example, you may have seen them in adverts of investment firms who are promoting their investment products.

Moreover, you may have come across the term when reading financial newspapers, including the Wall Street Journal and Financial Times, as most of them publish the returns of various money market funds every weekday.

In addition, you might also know about it if you read annual reports from big investment firms like Blackrock and Schroders.

What you need to know about the money market...

Now that you know the money market meaning, let’s discuss it in detail. First, you need to know about the main participants in the money market. The most common ones are banks, national and local governments, companies, hedge funds, central banks and investment funds.

Second, because of their short-term nature, money market funds tend to have stable yields compared to bonds. Third, these funds tend to be more liquid than other long-term investments. For example, most investment firms allow people to withdraw funds from their money market funds within a few days.

Also, the sector is what keeps most companies afloat because it provides them with immediate capital. 

Here are two common money market examples that will help you better understand the concept. First, a company may need some money to pay its employees at the end of the month. It can do so by using its cash reserves, using funds from its sales, or by taking a loan from a bank. A common strategy is to borrow funds from the money market in the form of commercial paper, which comes with lower interest rates.

Second, a government may need to raise money to fund a short-term project. To do this, it can get money from the money market using treasury bills. These are short-term bonds that mature within a year.

The money market is a very large part of the financial sector. For instance, the repurchase market transacts more than $4 trillion per day in the US only.