Investments: The Money Market



Similar to the bond market, the money market deals in fixed income securities. The big difference is that the money market deals in short-term debt and monetary instruments. To simply put it, money market instruments are methods of dues that mature in less than one year and are very liquid.

It may sound easy enough, however,  there is a reason why many brokers  do not propose you the ability to purchase money market securities. The reason for this is because money market securities trade in very high denominations, giving the regular investor limited available to them.

The simplest way for retail investors to avail access is through money market mutual funds or a money market bank account. These funds and accounts group together the assets of thousands of investors to buy money market securities. 

Other investors also buy Treasury bills (T-bills) and other money market instruments straight from Federal Reserve Banks or through other big financial institutions with direct right of entry to these markets. There are quite a few different instruments in the money market: certificates of deposit, T-bill, commercial paper, banker’s acceptances and many more. 

Risks and Objectives

The Institutional investors have used the money market as a protection for quite some time. The existence of money market mutual funds has permitted individual investors to take part in the money market  rates of return, which are greater than those of a savings account or other low-risk investments. The presentation of a money market fund  determined heavily on the interest rate situation. The best time to put your money in money market funds is when interest rates are peaking.

Money market funds are small-risk investments since they invest in short-term government treasuries, such as T-bills and in highly considered companies. One of the downside of money market funds is that they are not protected by the same federal securities, insurance that protect bank accounts, even though some funds follow insurance through private companies.

Buy or Sell It 

Money market funds can be purchased today through any bank or broker. You may need to get a full-service brokerage if you are looking to invest directly in the money  market, although you can sometimes purchase straight from the government.

There is a minimum investment in a money market fund, which is normally about $500-1,000, although investing directly in the money market can cost you anywhere from $1,000-$10,000 to begin with.

Strengths 

Increases in money market funds are typically tax exempted since they invest mostly in government securities. However, any dividends are taxable.

Since they are a good small-risk investment, money market funds are broadly used defensive investments when the stock markets are crashing.

Weaknesses 

Even though returns on a money market fund are bigger than those on a savings account, they are still much less than returns on equities or bonds. 

Other  money market securities are very expensive, within the $100,000 range, which makes it harder for individual investors to buy them.

Three Main Uses 

Income Protection

Capital appreciation

Tax-exempt Saving

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