What is the Money Market?
The money market is a subsection of the fixed income market. We generally think of the term "fixed income" as synonymous with bonds. In reality, a bond is just one type of fixed income security. The difference between the money market and the bond market is that the money market specializes in very short-term debt securities (debt that matures in less than one year). Money market investments are also called cash investments because of their short maturities.
Money market securities are essentially IOUs issued by governments, financial institutions, and large corporations. These instruments are very liquid and considered extraordinarily safe. Because they are extremely conservative, money market securities offer significantly lower return than most other securities.
One of the main differences between the money market and the stock market is that most money market securities trade in very high denominations. Furthermore, the money market is a dealer market, which means that firms buy and sell securities in their own accounts, at their own risk. This limits the access of the individual investor to the inventory held by their broker. Compare this to the stock market where a broker receives commission to acts as an agent, while the investor takes the risk of holding the stock. Another characteristic of a dealer market is the lack of a central trading floor or exchange. Deals are transacted over the phone or through electronic systems.
The easiest way for us to gain access to the money market is through a broker or by using money market mutual funds. These funds pool together the assets of thousands of investors in order to buy the money market securities on their behalf. However, some money market instruments, like treasury bills, may be purchased directly.
There are several different instruments in the money market, offering different returns and different risks. Let's take a look at the major ones.