Reviewing Money Market Basics

While this may be a refresher course for veteran investors, it may be potentially of great value for the novice who knows little or nothing about what a money market is and how it is used as an investment strategy by hundreds of investors the world over. Since there may be a degree of uncertainty about what they are, it seemed a good idea to explain it. Therefore, the purpose of this article is to define the essential points that help to define what a money market is.

First, it is important to locate where a money market derives its structure. Like bonds, money markets are established as fixed income securities. Basically, fixed income means that the investment has received returns in the form of regular or fixed payments that are not alterable under the terms of the investment loan. The money market is a very specialized fixed income security that deals with short-term debt securities that have fast maturity rates. (They have been called cash investments by some, due to this rapid maturity of the investment and complete compensation plus an added amount of interest, in some cases.

In essence, a money market functions like an IOU that was issued to the investor by big companies, government agencies, and financial institutions. As a result, they have a high liquidity rate and a well-earned reputation as a safe investment opportunity. A negative consequence comes in the form of lower returns when you compare them to other, high-risk securities that traded on the stock market.

There are some inherent limitations in place on money markets that may hinder or restrict access for the individual investor. Most of the time, this could be summarized by the amount of money that is required for trading on the money market. Unlike the stock market where there is a centralized exchange, most of the transactions performed by participating investors are done through alternative electronic systems or even via telephone. Most of these activities are performed by dealers on the dealer money market.

One way that individual investors can break into the closed system of the money market is through gathering with other investors in one or more money market mutual funds or by obtaining a money market bank account with a financial institution.

These, obviously, are the very basics and, as such, some material is left and can be readily obtained at a later date. There plenty of specifics that can be reviewed regarding the functioning, as well as pros and cons of dealing on a money market.

About the author:

Sean Rasmussen is the webmaster and founder of Universal Wealth Creation.

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