The money market is the market for short-term (one year or less) credit. At the wholesale level, it involves large-volume trades between institutions and traders.
At the retail level, it includes money market mutual funds bought by individual investors and money market accounts opened by bank customers.
The money market is the mechanism through which holders of temporary cash surpluses meet holders of temporary cash deficits. The money market is characterized by a high degree of safety and a relatively low return in interest.
The money market arises because for most individuals and institutions, cash inflows and outflows are rarely in perfect harmony with each other, and the holding of idle surplus cash is expensive.
Money Market instruments
The key money market instruments include:
• Treasury bills and short-term government notes
• savings accounts,
• money market deposit accounts
• Mutual funds: A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities such as stocks, bonds, money market instruments, and other assets.
• Certificates of deposit: A certificate of deposit (CD) is short-term security with a fixed interest rate and maturity date issued by a bank that seeks to raise funds from the secondary money market.
• Commercial paper: commercial paper is an unsecured, short-term debt instrument issued by a corporation, typically for the financing of account payables and inventories and meeting short-term liabilities.
• Call money: Call money is a very short-term bank loan that does not contain regular principal and interest payments. It is often used by brokerage firms to finance margin accounts.
• Interbank market
• Repurchase agreement /repo: A repurchase agreement (repo) is a form of short-term borrowing for dealers in government securities.
In a repo, a dealer sells government securities to investors, usually on an overnight basis, and buys them back the following day
• Time deposit: A time deposit is an interest-bearing bank deposit account that has a specified date of maturity.
Characteristics of the Money Market
• Money market investors seek mainly safety and liquidity, plus the opportunity to earn some interest income.
• Because funds invested in the money market represent only temporary cash surpluses and are usually needed in the near future, money market investors are especially sensitive to risk.
• Original maturities on money market instruments range from as short as one day on many loans to banks and security dealers to a full year on some bank deposits and T-bills.
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• But because there are so many money market securities outstanding, some of which reach maturity each day, investors have a wide menu of actual maturities from which to make their selections.
• It is not a single market but a collection of markets for several instruments
• It is a wholesale market of short-term debt instruments
The market where investment instruments like bonds, equities, and mortgages are traded is known as the capital market.
The primal role of this market is to make investments from investors who have surplus funds to the ones who are running a deficit.
The capital market offers both long-term and overnight funds. The different types of financial instruments that are traded in the capital markets are Equity instruments such as shares, Credit market instruments, insurance instruments, foreign exchange instruments, hybrid instruments, and derivative instruments.
There are two types of capital market:
• Primary market and
• Secondary market.
It is that market in which shares, debentures, and other securities are sold for the first time for collecting long-term capital. This market is concerned with new issues.
Therefore, the primary market is also called the NEW ISSUE MARKET. In this market, the flow of funds is from savers to borrowers (industries), hence, it helps directly in the capital formation of the country.
The money collected from this market is generally used by the companies to modernize the plant, machinery, and buildings, for extending business, and for setting up the new business units.
The features of the primary market include: it relates to new issues of securities such as shares, for example, the first time MTN issued shares in Ghana, you or some friends and family members bought some shares using mobile money or from some selected banks and financial institutions in Ghana. The market in which you bought the shares for the first.
time is called the primary market. Another feature is that the primary market has no particular place. This means that the transaction can be done anywhere using the telephone, in offices, and even at homes. The primary market comes before the secondary market.
Before the securities of a company or government can be traded on the secondary market, they must first be sold in the primary market. If this is not done, then trading in the secondary market becomes impossible.
There are various methods of raising capital in the primary market such as public issue, offer for sale, placing, right issue, etc.
these methods you have done in Company and Partnership Law. You remember right.
Good student. So, the legal issues you learned are also applicable in Business Finance too.
The secondary market is that market in which the buying and selling of the previously issued securities are done. The securities that were sold in the primary market are traded in the secondary market.
The transactions of the secondary market are generally done through the medium of the stock exchange. The chief purpose of the secondary market is to create liquidity in securities.
If an individual has bought some security and he now wants to sell it, he or she can do so through the medium of the stock exchange to sell or purchase through the medium of stock.
Trading on the stock exchange requires the services of the broker. In Ghana, we have the Ghana Stock Exchange, in the USA we have the New York Stock Exchange, Nigeria has the Nigerian Stock Exchange.
In any particular country, we have one stock exchange for the capital formation of a country.
The secondary market has the following features: It creates liquidity, comes after the primary market, has a particular place, and encourages new investments in financial securities.