The money market is one of those financial markets that most people have heard of but don’t really know what it is. In fact even when it is explained to them most people still aren’t sure what the money market is. This is because of bewildering array of instruments, many of them that would appear to have nothing in common are traded on the money market.
Basically any kind of loan that has a maturity date of less than a year can be traded on the money market. Since most of this trading is done by banks it really isn’t important that the average investor understand it. There are however a number of mutual funds that will allow you to put your money into this market, it may be a good idea to help balance out your portfolio.
The money market involves the trading of short term financial instruments. By and large the money market is made up of banks borrowing and lending amongst themselves. Although it is possible for investors to get involved in the money market as well. The types of financial instruments traded would include things like treasury bills, certificates of deposit or short term notes. There are actually a wide variety of things that can be traded in the money market the common theme of all of them is that they have less than a year until they mature.
When you go to the bank and deposit your money into something like a certificate of deposit they will pay you interest. Of course for this to be worth their while they need to get interest paid to them by somebody else and this is where the money market comes into play. The bank will sell that deposit to somebody else, in effect you loan the bank money and then the bank loans it to somebody else. Other instruments that are sold on the money market would include things like commercial paper which is just an unsecured promissory note from a corporation.
Normally these are sold a discount to face value. This usually happens because the person who holds the note doesn’t want to wait a year to get their money, they will take less than the note is worth to get cash now. The same thing happens with treasury bills, or short term mortgages.
Although it is possible to get into this market yourself most people who invest in this market do it through a mutual fund. The reason for this is that it is hard to make the transactions unless you are a bank. Large investors can make these kinds of transactions through their banks but they aren’t really set up for the retail customer.
The other issue is that it can be tricky to figure out exactly what you are buying on the money market so in most cases the best option is to let a professional handle it and invest your money in a money market mutual fund rather than directly in the market itself.