What Does the Financial Term Money Market Mean?
The financial term money market refers to the market for short-term loans government agencies and large corporations take out to meet cash flow needs. The money market is a highly liquid segment of the financial marketplace that allows the federal government and corporations to finance ongoing operations or cover deficits with future income that is not yet realized.
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Purpose
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The purpose of the money market is to help fund the immediate cash needs of large corporations and agencies of the federal government. Participating in the money market lets the government and corporations borrow money to fund programs, routine operations and payroll obligations. This helps these entities continue to operate normally and generate the income to pay off short-term bond obligations.
Fund Sources
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The money that circulates in the money market comes from money market accounts. Money market accounts are a mix of savings and checking accounts. Investors in money market accounts can keep cash in the account and earn interest like a savings account. However, money market accounts typically pay a higher interest rate than traditional savings accounts. In addition, investors have can make withdrawals, as with a checking account. Since a money market account is not a transaction account, withdrawals are limited to a certain number every month.
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Strategy
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Money market accounts are a form of mutual fund. A mutual fund is an account that uses investor proceeds to buy various investments. This strategy diversifies the holdings of a mutual fund and helps reduce risk inherent in putting all your money in only one investment. A money market account uses proceeds to buy only short-term investments like certificates of deposit, U.S. Treasury bonds and corporate bonds called commercial paper. All these instruments are low-risk and easily converted into cash by the investor.
Low Risk
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Compared with other types of investments, like stocks and long-term bonds, the money market is a low-risk segment of the financial markets. The low risk is chiefly due to the low-risk investments made by the money market fund managers. According to the U.S. Securities and Exchange Commission, this strategy is a legal requirement for all money market accounts.
Liquidity
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The nature of the investments traded in the money market make the money market very liquid. Liquidity is used to describe how easily investors can convert their investments into cash. The consistent need for short-term funds by government and large corporations and the low risk and better returns for investors help encourage the flow of short-term funds in the money markets.
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