A money market is a security that connects or allows a borrower to borrow money from a lender for a very short period of time. Money markets are an attractive investment tool because the investor will have access to huge sums of money at low costs. Money market instruments are used to finance the borrower’s short term financial needs. The borrower must however pay the lender a price in the form of an interest.
There are several participants that play different roles in the money market. Basically you will find lenders and borrowers and the some of the participants include; banks, money market funds, local and municipal governments, the Reserve Bank, different companies and securities dealers. These are the stakeholders that you can expect to deal with in a money market. Each one of them plays a specific role. There are certain technical terms that you need to know and understand if you want to be a money market investor. You will find different types of money market instruments and these will serve different needs. The most common money market include; treasury bills, commercial paper, discounted notes, certificate of deposits and repurchase agreements. Treasury bills are guaranteed and they mature in twelve months or even less. The investor will get the face value when the Treasury bill matures.
A certificate of deposit is a time deposit and it is issued by a bank. It pays a fixed rate interest. This is referred to as a CD. A commercial paper is also issued by a bank. The maturity period is anything between I and 270days it all depends on the corporation or bank issuing it. The promissory note is issued at a discount; the investor gets the face value. Governments issue discounted notes, they are issued at a discount and the maturity period is usually one year. There are many reasons why investors find the money market attractive. You will find that the money market is more stable than the stock market because the former is not subject to market fluctuation. Money market units are easy to value and the money market is the best place where you can maintain liquidity whilst at the same you wait for other lucrative investment opportunities. You will also find that the interest rates are competitive and are compounded daily, thus increasing your profits at the end of the day. Withdrawal fees and penalties are also very minimal in the money market.
Tips and comments
Having a money market account allows you to do a couple of convenient transactions. You can make electronic withdrawals and deposits using your checking account. You can do any wire transaction using your checking account. With a money market account you can also write checks any time. You can have your brokerage account linked to your money market account, thus making it easy for you to do your investments. So if you are looking for a stable and a highly liquidity form of investing, then the money market could the best investment vehicle for you. The rates are more attractive and your chances of losing are minimal.
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