The “money market” is where short-term financial assets that are easy to sell are traded. Its main goal is to help people get cash quickly. Money market securities can be quickly and cheaply turned into cash. All deals with a term of less than a year are part of this group. The financial market is neither a place nor a time. All traders who deal in short-term financial instruments are on the list. In this article, we will cover the features of money market along with equivalent matters around the topic.
On the money market, investors buy and sell “money equivalents,” which are other financial instruments that work like currency. It trades overnight in short-term funds and assets whose terms are less than a year. Instead of meeting in person, like at the stock exchange, people talk over the phone. Having access to India’s financial system is very important.
Features of Money Market
There are two parts to the economic market. Stocks and bonds make up the “capital markets”. They make it possible for businesses and other groups to get long-term funding. A company can use 10-year bonds to merge with another company or buy another one. In this post, we’ll examine the features of money market and grab extensive knowledge on the topics.
A Banker’s Acceptance is a legal document that backs up a transaction. A third party makes it in the name of the bank. The person holding the instrument had to be paid the specified amount by the issuer within 30 to 180 days of the date it was issued. A commercial bank guarantees payment, so there is no risk.
Money markets, on the other hand, trade a wide range of instruments instead of just stocks. There are a lot of differences between these bonds when it comes to their maturity, debt structure, credit risk, currency, and other things. Money market instruments are a good way to spread out risk. It provides a benchmark for short-term interest rates, which the financial industry uses to set prices on various financial instruments, making it an important features of money market.
Certificates of Deposits (CD)
Banks are the ones who give out certificates of deposit. In exchange for your money, they give you a fixed rate of interest. The main difference between a certificate of deposit (CD) and a fixed deposit (FD) is the amount of money invested. Compared to the first, the second isn’t too expensive ( 1 lakh or in multiples of 1 lakh thereafter).
Businesses prefer CDs over savings accounts because they have to put less money down at first. If a bank gives you a CD, it could be good for anywhere from 7 days to a year. Other financial institutions besides banks can give out CDs with terms of one to three years.
Treasury Bills (T-Bills)
One of the features of money market includes instruments like Treasury bills. The Reserve Bank of India gives out T-Bills so that the government can pay for its operations. They only need one year to be fully grown up. T-Bills can now be bought with maturities of 91 days, 182 days, or 1 year. Bonds that the Treasury has made are for sale. When the bond is paid off, the face value is given to the investor.
The rate of return for investors is the difference between what they put in at the beginning and what they get back at the end. Since the Indian government backs them, they are the safest short-term fixed income investments.
Another features of money market includes instruments like commercial paper. Large companies (CPs) issue commercial papers, which are a kind of short-term debt instrument. These companies have good enough credit that they can obtain commercial papers that do not require payment.
Key Money Market Participants
Since the money market only deals with big amounts, small investors can’t take part. Because of this, many institutional investors, such as banks and dealers looking for short-term loans, trade these securities.
The fact that these funds only last for a year makes them easy to get. These funds are like money in that they give investors a steady stream of income right away. Money market instruments are easy for institutions to borrow and invest in because they are liquid and have the same terms across currencies, maturity dates, debt structures, and credit risk. It is a features of money market.
Two parties make agreements to sell and then buy back a security, which are also called “buybacks” or Repurchase Agreements. This is a deal to buy and sell.At an agreed-upon date and price, the seller will buy the security from the buyer. The price may or may not be based on the buyer’s interest rate.
The interest rate that a buyer is willing to pay to buy a security is called the repo rate. When a seller needs cash fast, a repo could help them quickly sell their securities and make a profit. Most of the time, buyers make a lot of money.
The goal of the money market is to make it easier to do big deals. So, wealthy individual investors can take part in money markets directly, but the rest of us have to invest in debt mutual funds that do so.
Selling money market products at a discount to investors results in a fixed payment due date. Based on the person’s financial situation and time frame, they can choose the right tool.
Regulated by RB
The Reserve Bank of India (RBI) is in charge of how much one currency is worth in another. RB tightly controls the organised economy, but the shadow economy is not. Because the organised sector is so much bigger, the measures the RB takes to regulate it can have an effect on the whole market.
Because of how over-the-counter trading works on money markets around the world, it is not possible to do these kinds of deals in virtual environments. If allowed, people invest in the money market in person. The money market gives investors paper certificates.
These financial products are some of the safest ways to put your money to work. When investing in money market instruments, there is no risk of losing money because the issuers have high credit ratings and offer fixed returns.
Frequently Asked Questions
Who should Invest in Money Market Instruments?
Money market instruments should be taken into consideration by those looking for low-risk, short-term investments. For those who want to protect their capital while earning modest returns, these are suitable. Additionally, money market instruments are frequently used for liquidity management by businesses and institutions with excess cash.
Treasury bills and commercial paper are examples of these instruments that provide stability and quick access to capital. Money market instruments typically yield lower profits but offer greater security, so investors seeking higher returns may find other options like stocks or bonds to be more appealing.
What are the Pro and Cons about Investing in Money Market?
Investments in money markets provide low risk and quick access to money. They offer a steady way to generate moderate returns with low volatility. They are suitable for short-term objectives and emergency funds because they are frequently regarded as a safe haven for cash management. The cons of money market investments is that they typically offer lower returns than more risky ones. A loss in purchasing power could result from inflation that is faster than the returns. They are not the best option for long-term growth goals.
What’s the Importance of Money Market Features in the Economy?
Because they provide financial institutions, governments, and businesses with access to short-term borrowing and liquidity, money market features are crucial for the economy. Treasury bills, commercial paper, and short-term loans all exhibit these traits, which help to implement monetary policy, ensure a continuous cash flow, and enable effective capital allocation. Features of money markets help manage short-term financial requirements and offer low-risk investment opportunities, which support general economic growth and stability.
Read more about functions of money market to deepen your comprehension.Transactions on the money market can only happen verbally, through the necessary paperwork, and in writing. Unlike the stock exchange, the money market does not allow transactions to occur in a formal setting. It is necessary to make the deal without the help of brokers. Continue reading to become an expert in features of money market and learn everything you can about it.