Definition: The money market is a segment of the financial markets where short term maturity securities are negotiated. In other words, it’s the marketplace where highly liquid financial instruments are traded.
What Does Money Market Mean?
What is the definition of money market? The purpose of this market is to provide liquidity to market participants’ through short-term financing. The maturity of these instruments can range from a few hours to one year. The majority of participants, if not all of them, are financial institutions and regular companies looking to finance their regular, day-to-day operations using the funds provided through this market. In other words, a bank might need a loan for two hours to funds their cash reserves before the next delivery of cash arrives. Thus, the bank would take out a short-term loan on the market and pay interest to the lender. Some of the instruments traded in the MM are certificate of deposits, treasury bills, and commercial papers.
This market is not that heavily regulated since most of its players can be considered professional investors. Also, most transactions are settled over-the-counter and the size of each transaction is regularly high. This market has become more accessible to the investing public indirectly, through money market accounts and MM funds offered by financial services firms. These firms invest the money available in their client’s accounts in MM instruments that provide an additional investment return to their client’s money.
Here’s an example.
Example
Orange Financial LLC is a firm that provides financial services to both companies and individuals. One of the products available to individuals is a MM account. This account offers a return on investment a little bit higher than what the regular savings account is currently offering. Mrs. Simpson wants to invest her money in a MM account, but she doesn’t understand how they work.
Orange Financial explains that Mrs. Simpson’s funds will be placed in an account to invest them in the MM. As these extremely short-term investments become available, the bank will invest Mrs. Simpson’s funds in the securities. Remember, these securities might mature an hour after purchase. Thus at maturity, Mrs. Simpson’s account would receive the principle from the investment plus a small amount of interest. This type of transaction would occur multiple times each day in her account.
Summary Definition
Define Money Market: MM means a marketplace where highly liquid, short-term securities and debt instruments are traded by bank and financial institutions.
