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DEFINITION:
In the money market, banks, corporations, and the government can raise money by selling short-term debt instruments that investors can buy through money market accounts and other investments.
Understanding money markets
When companies and banks need short-term capital, they can use the money market to access low-cost financing. The government also participates in the money market by issuing Treasury bills. Banks and other dealers then typically buy these in bulk from the government and sell them to investors. Individuals can invest in the money market by opening a money market account at a bank or buying Treasury bills or money market funds. Because these are usually short-term investments – they are debts that mature in less than a year – money market investments are usually very liquid and relatively safe. In addition, you can usually withdraw these investments at any time without incurring high transaction fees.
EXAMPLE
Suppose John is the CEO of a company and wants to raise money to finance some of his daily operating expenses. He’s considering selling stock in his company. Instead, he decides to raise short-term capital through the money market by issuing commercial paper. In this way, John can raise the money he needs without selling any more shares in his company.
Takeaway
The money market is like a weekend getaway…
It’s easy and quick because it’s not a long-term commitment. Taking out a long-term loan, on the other hand, is like moving to a new city. You usually make a longer commitment, more things can go wrong, and you usually can’t just up and leave at any time without incurring losses.