Money market is that section of the financial market where short term financial instruments and securities are traded. Money market instruments include call money, commercial bill, commercial paper, certificate of deposits, treasury bill, banker’s acceptance and so on.
These instruments are short term financial instruments that have a maturity period of 30 days to a year. The maturity period is the factor that makes this market the best option to invest in liquid assets. The instruments that are traded in money market are also known as cash investments because of their maturity period. The traded securities are chiefly the IOUs (the informal document that acknowledges a debt) issued by financial institutions, governments and large corporations. These are extremely safe and highly liquid instruments.
Money Market vs. Stock Market
The basic differences between the two are given below:
- Unlike stock market, the securities in money market are traded in high denominations.
- Money market is basically a dealer market. Companies buy and sell securities at their own risk and in their own accounts. On the other hand, the stocks are usually traded through brokers who receive commission while the risk of holding the stock remains with the investor.
- Unlike stock market, there is no such central trading floor or what we call a exchange.
The only limitation associated with this market is incoherence. Also, due to the fact that these securities are significantly stable, they usually offer lower returns as compared to other securities.
Wow this is all so confusing. I always thought money was traded on the stock market with the “bulls and bears” thing, but I was wrong I guess…
Reading all these interesting articles makes me wish I went to business school and started a portfolio of investments a long time ago! No better time than now, though.