Brocker.Org: Money Market: What Is It?

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Money market securities are short-term IOUs issued by governments, financial institutions and large corporations. These instruments are very liquid and considered extremely safe. Defaults on money market instruments have been extremely rare. Because of this relative safety, money market securities offer significantly lower returns than most other securities.

There is no formal money market, rather it is an informal network of banks, brokers, dealer and financial institutions that are linked electronically.

One of the most important functions of the money market is providing an outlet for large companies with temporary excess cash to invest that cash in short-term money market instruments.

Corporations with short-term cash needs can sell securities such as commercial paper, or borrow funds on a short-term basis.

Larger corporations will generally participate directly via their dealer, while smaller companies with excess cash might just park it in a money market mutual fund, a professionally managed fund that invests in various money market instruments. The best way for individual investors to access the money market is also via a money market mutual fund, or a money market account with a bank. 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 from the Treasury.

Money market funds seek to maintain a stable $1 net asset value while paying a yield. Although these funds have traditionally held their price at $1 per share, some recent regulations allow certain funds to “break the buck” when needed.

Other than T-Bills, money market instruments are not riskless, but the risks are low. There have been defaults over the years, but they are not common.

Money Market: Treasury Bills (T-Bills)

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