Updated: May 26, 2018
What is a Money Market?
The money market is where financial instruments (deposits, loan, and assets) with high liquidity and very short maturities are traded. Money market securities are issued by governments, financial institutions, and large corporations. It is used by many participants, including companies, to raise funds by selling commercial papers in the market. Money market is considered a safe place to invest due to the high liquidity of securities.
Money Market’s Functions
One of the most important functions of the money market is providing an outlet for large companies with temporary excess cash to invest that cash in short-term money market instruments. But basically, money markets serve five functions—to finance trade, finance industry, invest profitably, enhance commercial banks’ self-sufficiency, and lubricate central bank policies.
Money Market Participants
Institutions that participate in the money market include banks that lend to one another and to large corporations in the Eurocurrency and time deposit markets. Corporations with short-term cash needs can sell securities such as commercial paper, or borrow funds on a short-term basis. Larger corporations will generally participate directly via their dealer, while smaller companies with excess cash might just park it in a money market mutual fund, a professionally managed fund that invests in various money market instruments.
Capital Market vs. Money Market
From seller’s standpoint, both capital market and money market provide a necessary business function: maintaining adequate levels of funding. Capital markets offer higher-risk investments, while money markets offer safer assets; money market returns are often low but steady, while capital markets offer higher returns. In addition, the major institutions that work in money market are the central bank, commercial bank, non-financial institutions and acceptance houses. On the contrary, the major institutions which operate in the capital market are stock exchange, non-banking institutions etc.