Money market is basically that particular section of the finance market wherein finance related instruments, with very brief maturities and high amount of liquidity are adequately traded. The money market is utilized by the participants for the purpose of lending and borrowing for a brief period, for a number of days to a little less than a year. The securities of money market incorporates certificates of deposit that are negotiable, U.S. Treasury related bills, bankers acceptance, commercial paper, federal funds, repurchase agreements and municipal notes.
The money market is utilized by a variety of participants, including an entity that raises money by selling off commercial paper in the market as well as an investor buying certificates of deposits as a safe option for keeping money for a brief period. The reason why the money market is considered to be safe option for putting money is because of the fact that the short maturities’ as well as securities’ nature is very liquid. However, there are certain risks involved in the market, which an investor must be careful about and this includes the risk of securities default. The money market is an ideal place for the government and large organizations for managing their short-period cash related requirements.
Money Market Functions
The money market plays a significant role in the economy. It serves as a market for indulging in transactions for a short period. Therefore, it has to offer the facility of adjusting liquidity for the business corporations, banks, financial institutions and non-banking financial institutions aside to investors. The important functions of Money market are:
- Maintaining money related equilibrium i.e. to maintain a balance between supply of and demand for money for transactions that are done for a short period.
- Money market promotes the growth and development of the economy. This is done by making money available for different units of economy i.e. small-scale industries and agriculture.
- Money market provides assistance to industry and trade. The Money market does this by providing sufficient funds to trade as well as industry.
- Helps in implementation of monetary policies.
- Money market provides assistance in formation of capital.
- It also offers non-inflationary finance sources to government. This is achieved by issuing treasury related bills for the purpose of raising short loans.