A corporation or financial intermediary can temporarily store excess funds in the money market. In reality, the timing of money needs and inflows rarely align for individuals, businesses, and governments. This applies to all three categories. Companies and economic entities opt to invest in the money market as an alternative to keeping cash idle in a bank, which results in potential interest earnings loss. By investing in money market instruments, they can preserve value and easily convert them back into cash. The money market serves as a warehouse for transferring large sums of money between those who have surplus funds and those in need. Banks and investment firms often hold their assets in the money market to address capital withdrawals. This article will delve into the objectives of the money market in detail.
The money market connects those with temporary surplus funds with those who need to make immediate purchases with cash. This makes it far less of a hassle for both lenders and borrowers to meet immediate financial obligations. The money market serves as a check and balance in this process, making sure there is always enough short-term currency on hand. Your education will advance on topic features of money market if you read more.
Objectives of Money Market
The money market is a short-term lending and borrowing alternative to the capital market, which is concerned with long-term investments. The money market often serves as the settlement platform for many of a country’s financial transactions. In another sense, the term “money market” refers to the lending and borrowing of short-term cash. We’re going to take a look at the objectives of money market and discuss related matters in this topic.
Maturity
To help governments, businesses, and financial institutions satisfy their short-term capital needs is the primary function of money market assets. The majority of these acquisitions will take place within the next three months, while a few may experience delays of up to a year.
High Liquidity
These investments are very liquid because of their accessibility to cash. Money market assets are highly liquid because of their short-term nature. The primary reason for this is their rapid principal repayment. Investors choose money market assets because they yield a better rate of return on principal than savings accounts. This is due in part to the high liquidity of money market instruments.
Transaction
There can be no use of middlemen or brokers in these dealings. The money market consists of various financial institutions such as the central bank, commercial banks, non-banking financial companies, discount houses, and acceptance houses. The group also includes Acceptance Houses. Commercial banks control the vast majority of this industry’s market share. The objectives of the money market revolve around providing liquidity,
Structure
Included in this category are the call money market, short-term market, capital market, stock market, bill market, and discount market. These markets have been operating for quite some time, and many of them are extremely organized and efficient. The money market is both more complete and complex when there are many different types of marketplaces.
Very Safe
Investors can keep their money secure and out of harm’s way with these assets. To ensure the safety of money market funds, regulatory bodies like the Financial Services Authority [FSA] in the UK and the Securities and Exchange Commission [SEC] in the US have issued rules requiring that 95% of a money market fund’s securities have the highest credit ratings from at least two of the country’s major credit rating agencies. This arrangement guarantees that safe investments hold the majority of assets in a money market fund. As a result, there is a disproportionate number of high-quality Money Market assets compared to other investment-grade assets (Orrill) from reputable organizations like Moody’s and Standard & Poor’s.
Limitations
However, this is not how other capital markets have developed, and it certainly isn’t how the Indian capital market has expanded. In modern parlance, “capital market” and “equity market” signify exactly the same thing. The debt market is far larger than the stock market in most developed nations. This includes the United States, the United Kingdom of Great Britain, and Japan. Accredited financial organizations such as banks, brokerage firms, and pension funds exclusively purchase and sell government bonds.
Funds
Money market mutual funds are the most common vehicle for investing in money market securities. This is due to the high volume of transactions typically associated with money market securities. Investors who are risk averse or seeking a compromise between high-risk and high-return options often turn to money market funds. This is due to the fact that the money market fund is extremely conservative and has plenty of liquid assets.nbsp; One of the primary objectives of the money market is to provide a platform for financial institutions and investors to meet their short-term funding needs.
General Characteristics;
“Near money,” or investable cash and assets with a short time horizon, are the only currency in this market. Consider only financial assets with maturities of a year or less. Consider only things with a low barrier to entry to the cash market. Close the majority of business deals via telephone or face-to-face meetings. Once that’s done, dispatch correspondence. Note that there is no centralized location for making deals, unlike a stock exchange in a capital market.
Government Safety
Government assets, typically short-term money market products, frequently serve as the primary items traded on stock exchanges. Money market instruments include deposits at financial institutions, banker’s acceptances, certificates of deposit, and corporate papers issued by non-financial entities. Borrowing funds in the money markets does not contribute to price increases.
More Competitive
Commercial banks and other organizations, such as international banks and leasing and factoring firms, can raise capital through the money markets as well. Large corporations can issue commercial paper on the money markets as a kind of short-term assets. As a result, the market for corporate loans becomes more competitive and less able to be dominated by large commercial banks. The objectives of the money market strives to ensure fair and transparent practices in money market transactions, safeguarding the interests of participants.
The global money market consists of the individual money markets of each country. The institutions dealing in short-term lending and borrowing form these segments of the money market. The financial system expands along with the business.
FAQ
What is Change in the Money Market?
The SEC claims the additional limits are necessary to make “structural and operational adjustments” to money market funds in order to decrease the danger of investor runs on the funds without sacrificing the funds’ benefits.Based on the criteria, money market funds can be classified as private, government, or institutional.
On the Money Markets, what Kinds of Financial Instruments are Traded?
Occasional recommendations are made to store funds needed within a year by trading stocks on money markets. This is because money market instruments often offer lower interest rates than other investment options. Commercial paper, bankers’ acceptances, and certificates of deposit are only some of the financial assets that can be bought and sold in the money market.
Do Money Markets Earn Interest?
Money market accounts are advantageous because they allow account holders to earn interest on their funds, unlike standard checking accounts.
Final Words
When they have spare cash, they invest it in money market items that won’t lose value soon and can be easily converted back into cash. The “warehousing” function of the money market allows for the rapid transfer of huge sums of money between those who have money and those who need money. The money market was where most banks and investment firms held their assets for dealing with withdrawals of capital. There are two broad categories of the Indian financial market: the organized and the unstructured. There are several different types of organized money markets: call/notice money market, term money market, bank bill market, and bill market. Local bankers, moneylenders, and other financial and banking intermediaries make up the unstructured portion of the market. This article discusses in detail about objectives of money market.
