Money Market

A money market is a sub-section of the fixed-income market. Most people think of bonds and fixed income being the same thing, but in truth, a bond is only one of the many types of fixed-income security. The main difference between the bond market and the money market is that the money market is focused on shorter-term securities (with maturity dates of less than a year). Because of their short maturities, money market investments are also sometimes called cash investments. Money market securities are basically IOUs given out by banks, corporations and governments. These securities are very mobile and are considered very safe, meaning that they offer diminished returns as compared with other types of securities.

Money markets offer a lot of the same benefits as a certificate of deposit (CD), with a lot of the features of a checking account. Strictly speaking, a money market is essentially a mutual fund that tries to keep its share price constant. A fund manager takes the money deposited into the money market, and invests it in savings bonds, T-bills, CDs, and other relatively safe instruments. The income from these investments is disbursed to those that own the money market. The money market is also different from the stock market, in that most of the securities are traded in high denominations. This makes it hard for individual investors to make it into the market, where dealers buy and sell their own securities at their own risk. Compare that to the stock market, where a broker gets paid to act like an agent, while the investor assumes the risk. In most cases, money markets lack a central location, with all transactions done electronically or over the phone.

The best way for an individual to get into the money market is with a mutual fund, or through a bank account linked to the money market. These accounts commingle the assets of thousands of individual investors in order to buy the money market securities. However, some money market instruments, such as T-bills, can be bought directly. or they can be bought through larger financial institutions that enjoy access to the money market.