Investing in money market can be a profitable option for a number of investors. A money market is that type of a financial market that deals with short-term lending and borrowing all over the world. Money market offers liquid financing options for global financial system for a short term.
The money market constitutes a segment of the capital market where the trading of short term instruments are traded. Examples of such instruments are commercial papers, banker's acceptance, and treasury bills.
A money market is made up of dealers of money or credit and financial institutions who participate in the borrowing and lending activities. These activities are done for a short time period, usually maximum 13 months. Normally, the money market instruments are known as paper. It has a contrasting feature from capital market which deals with long term financing provided by stocks and bonds. In the money market, the borrowing and lending takes place between various banks.
The benchmarking of money market instruments is usually done by LIBOR (London Interbank Offered Rate). The money market instruments are traded in the money centers which are located in London, Tokyo, New York, and Greenwich.
GMAC is a reputed financial institution when it comes to investment in money market, which issues a number of asset backed commercial paper. General Electric, which has a high credit rating, is also a significant names for investors who want to invest in money market. It issues commercial paper using their own credit. The U.S. Treasury Department issues treasury bills for the purpose of financing the public debt of U.S. The municipal paper is issued by the local and state governments.
The following financial institutions utilize money market instruments for various purposes:
- Banks
- Central Banks
- Retail and Institutional Money Market Funds
- Cash management programs
- Arbitrage Asset backed commercial paper conduits, which looks for purchasing higher yielding paper, when they themselves sell cheaper paper
- Trading companies frequently buy banker's acceptances to be offered for paying the overseas suppliers
The money market instruments can be usually categorized into the following types:
- Bankers' acceptance
- Repurchase agreements
- Commercial paper
- Eurodollar deposit
- Federal Agency Short-Term Securities - (in the US)
- Federal funds - (in the US)
- Municipal notes - (in the US)
- Repurchase agreements or Short-term loans
- Treasury bills - applicable for the U.S.
- Money market mutual funds
- Certificate of deposit