What is money market?

Money market is a term you’ve probably come across online. As you’re reading this, you’re probably not aware of what it means. We’ll tell you what is money market and offer a little more than the standard definitions you’ll find in encyclopedias.
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Definition of “Money Market”

Money is a commodity in itself. Trading money is a way to make more of it and that’s exactly what happens in the money market. This is a section of the financial services market in which financial instruments with high liquidity and short maturities are traded. This market allows its participants to lend and borrow cash over short periods meaning that money is lent for anywhere from one day to just under a year. This market is seen as a very safe place to put money because of its high liquidity nature and the short maturities. But there are risks of course. The risk of default on securities, such as commercial paper, is something that any investor needs to be aware of.

What does this market consist of and how did it start?

The market started because there were firms with surplus cash not making money for them and others without enough money to stay afloat. Each benefits the other with this marketplace. The market consists of negotiable certificates of deposit (CDs), commercial paper, banker’s acceptances, municipal notes, U.S. Treasury bills, federal funds and repurchase agreements (repos).


Those involved heavily with the market include trading firms, retail and institutional money market funds, banks, central banks and merchant bankers.


The main function of this marketplace is internal and international trade. Profitable investment is obviously important but we shouldn’t underestimate the wider benefits such as the market’s ability to help the central banking system. The existence of this market increases the efficiency of the central bank.

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