The money market is the market for short-term securities. Investors can find a low-risk, low-return investment in the money market.
What is the money market?
- The money market is the market for short-term securities with less than a three-year maturity.
- Various institutions issue different securities in the money market.
- Individual investors may participate in the money market through money market funds or accounts.
The money market gives institutions with excess cash flows a place to put their money, providing temporary funding to those with operational needs. Money markets help banks and other institutions to maintain their required liquidity levels more easily. Capital markets are typically used for more long-term financing.
The federal government issues U.S. Treasury Bills, banks issue certificates of deposit, or CDs, and large businesses may issue commercial papers in the money market. Short-term bonds and guaranteed investment certificates are also exchanged.
Investors may choose to invest in the money market as an alternative to putting their savings in the bank. While low-risk and low-return, the money market has the potential for higher returns than a traditional savings account.
To enter the money market, individual investors have two options: a money market fund or a money market account. While money market accounts offer potentially higher interest rates, they may also come with higher minimum balance requirements and withdrawal restrictions.