Money Market

The money market is a very large area of the financial world. In a limited way the average investor can participate but most of the transactions in the money market are between banks. It is basically a means of allowing short term borrowing. The banks have figured out that if they have extra cash around it makes sense to lend out in short term deals to other banks so that they can earn interest on it. This has resulted in a huge market that many institutions now participate in.

The money market is basically anywhere that money is borrowed or loaned for short periods of time. It generally includes anything that has a maturity date of less than a year. This can be a very profitable investment but it generally isn’t aimed at the average investor. The vast majority of money market transactions are done between banks trading with each other. The reason for this is primarily the huge amounts that are usually involved. In most cases any money market instrument is going to be denominated in hundreds of thousands of dollars making them out of reach for the average investor. The other problem is that there is no central money market. The transactions are made directly between the participants with no broker acting as in intermediary. This makes it hard for the average investor to get involved. Nevertheless there are a few ways that you can invest in the money market.

The first way that the average investor can get involved in the money market is with treasury bills. These are issued by the government in order to raise money. They will have maturity dates of between three months and one year. They are also denominated in low enough values that most people can afford to buy them. They are a very safe investment which is what makes them appealing. The downside is that the interest is very low, barely over what you would get in a savings account.

The other common way that you can invest in the money market is with a certificate of deposit. This is something that your bank will offer. They also have terms of three months to one year. They offer interest rates that are slightly higher than treasury bills but not by much. They also have the disadvantage of tying your money up for the duration of the certificate.

The third way that you can get involved in the money market is through a mutual fund. There are a number of mutual funds that specialize in money market instruments. Because of their much larger resources the mutual funds can participate in the more complex and expensive transactions that the average investor can’t. This tends to result in the mutual funds being more profitable than things like treasury bills and certificates of deposits. A mutual fund that specializes in the money market can be a good way to diversify your investment portfolio.