Some of the most often utilized short-term products on the money market are interbank call money, short-notice deposits, Treasury Bills with maturities of 91 days and 364 days, commercial bills, certificates of deposit, and commercial paper. Each of these products has a place on the money market. We will go over the features of money market in detail in this article.
A capital market is an exchange where entities such as governments, corporations, and financial institutions can raise funds for operational expenses and long-term investments. These cash can serve for both immediate and future purchases. There is a growing consensus that capital markets are essential to the functioning of a capitalist economy. One of the three most common categories of securities traded on the capital markets is money market securities.
Features of Money Market
Businesses, governments, and individual investors all turn to the money market when in need of quick cash or a safe location to park their funds. Although the money market is home to a wide variety of products, they all share certain characteristics. We’re going to take a look at the features of money market and discuss related matters in this topic.
Key People in the Money Market
The money markets only deal in large sums, therefore individual investors can’t participate. This is why many large financial institutions engage in trading these assets. Institutional investors include lending and borrowing institutions like banks and brokers.
T-bills are Short for Treasury Bills
The Reserve Bank of India issues Treasury Bills (or T-Bills) on behalf of the Central Government of India to raise funds. The Reserve Bank of India prints these banknotes. In as little as a year, they’ve fully developed into adults. There are currently three maturities available for Treasury Bills. Investors can purchase T-Bills for 91, 182, or 365 days. Investors typically trade T-Bills at a discount to their face value. After the investment term expires, the investor receives the cash value. The rate of return is calculated by adding the investment’s original value to its current market value. T-Bills, backed by the Indian government, represent the safest type of short-term fixed income investment.
Trading in Person
Since the majority of currency exchanges occur in person, online trading is currently not an option. As a result, only authorized individuals can make transactions in the money market in person. The buyer of the money market instrument receives a subsequent physical certificate.
Secure Investment
Investors widely regard these financial instruments as some of the most secure investments available today. Most sellers in the money market have high credit scores, resulting in low risk of loss, and the returns are predetermined. Features of money market instruments are highly liquid, allowing investors to buy and sell them with ease at prevailing market prices.
Banker’s Acceptance
A private individual or organization issues a banker’s acceptance in the name of a bank. The issuer must pay the holder of the instrument a specified sum within 30 to 180 days from the day of issuance. A commercial bank has guaranteed the payment, making this a secure financial instrument.
Commercial Papers
Commercial Papers, often abbreviated as “CPs,” are a form of short-term promissory note used mostly by large corporations and government agencies to fund their daily operations immediately. Due to the high creditworthiness of the issuing companies, commercial papers constitute unsecured debt. The creditworthiness of the company stands in place of physical assets as collateral for the financial instrument.
Wholesale Market
The financial markets structure themselves to accommodate both large and small orders. Therefore, those with sufficient funds can participate directly in money markets as retail investors. Individuals can profit from this market by investing in debt mutual funds that features on the money market.
Agreements to Buy and Sell
A Repurchase Agreement is a legally binding contract between two parties when one party sells a security to the other party with the expectation of repurchasing the security from the buyer at a later date. Buybacks and repos are two other names for these types of transactions. A sell-buy agreement is another name for this type of commercial transaction.
Buyer and Seller Agree on Interest Rate Prior to Seller Purchasing Security at Agreed Upon Time and Amount. The “repo rate” refers to the interest rate the buyer incurs when making a purchase commitment. A seller who needs cash immediately can accomplish so by selling their shares and receiving payment instantly. The buyer may receive a satisfactory rate of return on their investment.
High Liquidity
These funds are extremely liquid because they expire after only a year. In addition, many people view these funds as an acceptable substitute for currency due to the regular income they may provide to owners in a relatively short period of time. Businesses seeking to borrow or invest short-term funds often find money market instruments ideal due to their liquidity and the ease of trading them across currencies, maturities, debt structures, and credit risk.
Multiple Instruments
However, money markets are distinct from capital markets due to the specialized nature of capital market transactions. Different maturities, lending structures, credit risks, and currencies distinguish each of these securities. Investors widely regard products based on the money market as the most effective means of diversification through exposure. Features of money market instruments often offer fixed or predetermined yields, providing certainty to investors regarding the return on their investments.
Fixed Yields
Money market instruments are issued and traded at a discount, allowing investors to determine their maturity amount accurately. With this information in hand, investors may make a more informed decision about which financial instrument is right for their goals and time horizon.
Controlled by the Rb
The Reserve Bank of India regulates and monitors the Indian financial system. The Reserve Bank is the sole entity with any influence in the corporate world. It exerts essentially no influence over the much smaller unregulated sector. In contrast, RB restrictions can have a significant impact on the functioning of this market as a whole because the organized sector is so much larger. This is because the actions done by regulators can significantly alter the dynamics of the entire market.
Cd Stands for “certificate of Deposit”
Banks and other financial institutions may issue CDs, which are a type of financial asset. The interest rate they give is fixed and is calculated on the total amount borrowed. Maximum CD investment is significantly lower than maximum savings account investment. The first option is only accessible to those with extremely large budgets (a minimum of 1 lakh, increasing by 1 lakh increments).
When it comes to earning interest on spare cash and stowing it away for the short term, businesses are more likely than individuals to turn to certificates of deposit. The reason for this is the requirement of a minimum investment. Certificates of deposit issued by a financial institution often have a redemption period ranging from seven days to one year. Other financial organizations may offer CDs with terms ranging from one to three years. Features of money market rates, such as the interbank lending rate, influence the broader interest rate structure in the financial system.
FAQ
Who is in Charge of the Indian Money Market?
The Indian financial markets are currently overseen by the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India.
Who should Buy Money Market Instruments?
Money market products are good options for investors who wish to earn a constant return on their money while keeping it secure for a limited time.
How are Products on the Money Market Different from Stocks and Bonds?
Investors in the money market are essentially just creditors. They have no stake in the issuing company. However, equity is a form of capital that is owned by the company’s shareholders. Debtors include, for instance, bondholders of a corporation. Conversely, stockholders are considered to be co-owners of the company in which they invested.
Final Words
The money market is mostly a telephone-based industry. You can make transactions on the money market with or without the assistance of dealers. It’s a market for trading money and other short-term financial assets. Financial assets that are “close substitutes for money” can be converted into cash quickly, easily, and without loss of value at the lowest possible transaction cost. This article discusses in detail about features of money market. To understand more clearly about functions of money market, keep reading.
