The money market is a marketplace where banks, credit unions, and other financial institutions trade their excess cash. The term “excess cash” refers to a financial institution’s cash.
Know the pros of investing in the money market
The money market is a very liquid market, which means many buyers and sellers with stable and reliable rates. If a financial institution wants to sell cash, many willing buyers are looking to buy that cash. However, if that same financial institution wants to borrow money, many willing lenders are looking to lend that cash.
Identifying the risks of investing in the money market
To help investors identify the risks and manage their investments, the Federal Reserve publishes regular money market statistics and guidance on money market risks.
Among the most crucial money market statistics are the following:
- Total cash held by U.S. depository institutions – The number of cash banks have on hand to lend to other financial institutions or to make daily financial obligations
- Total cash held by non-financial companies and by households – The amount of cash these types of companies and individuals have on hand that they can lend to other financial institutions or make daily financial obligations
- Daily balances – The amount in cash that financial institutions make daily financial obligations with
- Annualized turnover rate – The percentage of the daily balances that are transferred from one financial institution to another
- Open-market operations and repurchase agreements – Open-market operations are when the Federal Reserve buys or sells securities to control the amount of money in the economy or manage interest rates such as the federal funds rate. Repurchase agreements are loans that allow the Federal Reserve to manage its cash.
Ways to invest in the money market
There are various methods to invest in the money market, including a bank or credit union savings account, a money market mutual fund, or a Treasury bill. Most financial institutions that provide money market products will not lend money directly. Instead, they will give investors a safe, government-backed short-term debt called a bill or a bond. As a bill or bondholder, investors are not lending money. Instead, they are getting a particular type of short-term debt that the Federal Reserve already holds. This type of debt is called “open-market operations and repurchase agreements.”
The money market is an excellent place for short-term or liquid assets investments. However, investors should choose the right type of investment fund and make sure it is suitable for their investment needs.