How the Money Market Can Help Your Investment Drive
If you didn't know that there was also a market for money, you are about to know about this market and how it operates. More importantly, you will get to know how the existence of such market could serve your interest, whether as an investor or just for the efficient management of personal or business finances.
What the Money Market is
The money market is a key part of the financial market. The financial market encompasses the whole system for trading in financial securities, commodities, foreign exchange, derivatives and even insurance. Specifically, we speak of the stock market, the bond market, the money market, the commodities market, foreign exchange market, derivatives market and also the insurance market as the financial market. These segments of the financial market are the domain of key financial activities that underpin wealth creation for individuals and businesses. So, they should be of strong interest to you. Let's focus here on the money market.
The money market is the market where short-term debt financing and short-term investments are structured and transacted. Financial transactions are generally considered short-term if their tenor is not beyond one year. The money market is therefore the market for short-tenored lending and borrowing. By that, it is a largely liquid market because the instruments traded have short maturities. Unlike the capital market, it does not have a specific floor or trading location. It rather refers to the connectivity of channels and systems that enable institutions and individuals to raise short-term money, when they need it or to invest short-term, when they have surpluses that they prefer to invest for a short tenor. Most national financial systems, just as at the global level, have such framework for shortterm fund trading. The key actors in this market are:
- The banks, including the Central Bank. Banks consistute the dominant player as they borrow from and lend to one another to bridge funding gaps or optimise returns from fund balances in the cause of their daily operations. Banks trade in money in the money market which actually has a segment referred to as the interbank market.
- Discount houses. Like the banks, they actively manage and trade in short-term maturity instruments either for themselves or their clients.
- Companies. When they need long-term funds to execute capital projects, they resort to the capital market, but when they require short-term funding to cover cashflow gaps, they approach the money market which is better positioned for such interventionist funding. At other times, they are investing some cash surpluses in the money market to maintain optimal liquidity and still earn revenue.
- Institutional fund managers that run a money market fund or one with a proportion of money market assets, also actively participate in the money market.
- The government, which borrows short sometimes to fund its obligations. Besides, the Central bank, on behalf of the governement can buy or sell short-term securities as part of monetary policy management initiative, for example, to contain the level of inflation .
- Individual investors like you. Yes, the money market has its unique role and benefits for your investment and financial management objectives.
Why Short-term Funding Transactions?
Every company, institution, government and even individual has some running costs to meet. That requires liquidity, which is why some cashholding is important. However, because it is difficult to precisely anticipate the scope of that cash requirement (due to the exigencies of business and life), it is easy to over- or under-provide. Either situation will pose a problem, whether to an individual or institution. When you run short, a lot could go wrong in terms of disrupted business, missed opportunities, embarrassing and reputation-damaging default on obligations and all sorts of induced crises. If you overprovide, you lose earnings because you carry idle, unproductive funds which could also be misused. That is where the money market plays a stabilising role. It helps, for instance, in placing money in a reasonably liquid state that however earns income until you want to apply it. It funds your gap when you miscalculate or somehow run short of immediate fundings to meet due obligations. By effectively using the money market, you are enabled to optimise your fund management and more importantly, achieve a smoth operation. Those short-term funding needs of banks, governmnents, other financial institutions and companies are also what create an opportunity for the individual to intervene in the money market to advance his investment and fund management strategy.
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Structure Your Short-term Fund Management
If you run a business, understanding how the money market works will help you achieve efficient financial management and you really need that to sustain your business. A lot of businesses die from financial mismanagement, an area where the money market could help a lot. As an individual, too, you will benefit by taking advantage of various financial securities and investment instruments created by banks, the Central Bank and companies for trading in the money market. Experts of personal financial planning expect some holding of money market assets in a solid investment portfolio since those assets provide vital liquidity and a high level of safety (low default risk). The Treasury Bill you buy, for instance, will probably have a maximum tenor of 90 days and even before maturity, you can re-discount it for cash. Meanwhile, your principal is ever intact, not affected by any market price swings. Then add that this is a Federal Goevernment instrument with insignificant default risk and you will begin to get a picture of how useful they can be. The downside will be mainly in the lower rate of return they generally provide.
So, that's the general picture. Other articles in this section deal with the specifics of investment optons, how to intervene in this market and other facts that might be of interest to you. Welcome to the market where money is bought and sold as an item of trade.
