Money Market

What is the Money Market?

The money markets provide a central market where short-term borrowing and lending takes place.  Money markets is a large part of the fixed income market, providing liquidity to banks and other large institutions, including the U.S. government.  This market is historically considered nearly risk free due to the amount of liquidity and the lack of risk that is taken through investments in this sector.  Due to the lack of risk that is assumed within this sector, yields will also be smaller, as compared to other long term bonds or other long term financial instruments. 

Professional money managers and other large institutions will invest large sums of cash in government bonds, commercial paper, CD's, savings bonds, banker's acceptance, eurodollars, repos, and other safe investments to achieve a higher yield for their investors as opposed to traditional bank rates.  Conversely, many corporate borrowers issue "paper", or short term instruments, which are highly liquid and have maturities of typically less than 1 year. 

How can I participate in the Money Markets?

Due to the large denominations that are traded in the money markets, it is nearly impossible for most individual investors to directly access this market without using an intermediary.  Individuals can enter into the money market through money market mutual funds by opening a money market account at a banking institution or even with a brokerage company.  It is like setting up a checking account which earns more interest than a traditional bank account would.  You can write checks against it; add funds and withdraws funds on demand.