Various Instruments Traded in Money Market

Money market is a place; well actually, money market is called a place just for convenience, but in reality it has not been assigned a definite place as such (like there is a platform called stock exchange which exists for share market and facilitates trading); it functions with the help of an unofficial arrangement and set up of organizations comprising banks and traders, who are connected via fax, telephones, and lately via computers) where the larger financial institutions facilitate an array of traders comprising borrowers and investors offering them with an opportunity to buy and sell various short-term instruments.

Money markets do not just exist in America; they function in many countries across the world. Short term debts and equities which are main type of instruments that are sold in the money market are very cash friendly and convertible (liquid) and comes with a wide range of maturity periods starting from one day to one year.

Some familiar and widespread money market instruments come in the form of Eurodollar deposits, certificates of deposit, also referred in short in CDs, bankers’ acceptances, treasury bills, federal agency notes, commercial paper, and repurchase agreements etc. Those who make the funds available for trading money market instruments are institutions as well as individuals who are looking for high liquidity and the low risks in their investment.

Following is the list and short description about various types of Money Market Securities:

Treasury Bills:

Commonly referred to as T bills are amongst the most popular and marketable money market instruments. Their success secret lies in their overall simplicity and affordability even by single investor. Other plus points include, their safety; they are considered safest, because of backing of Government of the country issuing them; they are tax exempted locally again because they are issued by Government to raise funds.

It is with the help of these that the US government is generally seen to raises public fund for various projects. Treasury bills are short-term securities which may reach its full term in 3 months, six months or at the most one year from the date of their issue.

T bills are issued via bidding happening at auctions. The applicant may choose to submit bids either competitively or non-competitively.

Federal Agency Notes:

Some federal government agencies have the liberty to issue both – short and long term obligations, happen to be preferred choice for corporations. Like T bills they are not backed by government but still they are considered pretty secure; considering their status the rate of returns also happens to be better than that of T bills. They also happen to be popular trading instruments but certainly do not enjoy the same status as T bills.

Short Term Tax Exempts:

These type of money market instruments are short term notes and are initiated by state or municipal level government bodies. Some of its prominent features are that, they are riskier than T bills; yield better returns than T bills; less negotiable; and are exempted from tax. Again happens to be choice of corporations.

CDs or Certificates of Deposits:

These money market instruments are issued by a federally chartered bank in reciprocation of deposited funds which help investor to earn a predefined return for a fixed time period. There are many types of CDs offered by the bank where investor loans amounts to bank which they commit to repay with interest at the end of the period as mutually decided/ as per policy; whatever may be in force or applicable at the point of time. If fund is withdrawn by investor before time, he is charged penalty over it. Some are easily transferable CDs while some are not.

Commercial Paper:

Money market instruments comprising non Secure Pro-note that can be issued by financial or non financial institutions which are large, credit-worthy corporations, which makes them safe for investors. They come with maturities of up to 270 days. Their quality is rated by S & P and Moody’s from time to time.

Commercial papers have no need for middlemen, or agents like banks etc as they can be directly issued by established and reputed companies and the cuts and commissions that otherwise go into broker’s pockets are passed down to investors in the form of increased return. However there are times when agents come in between and they do charge a fee for complying.

Sometimes there are instances where banks support and acknowledge the commercial papers; however it should be kept in mind that by doing this they are in no way guaranteeing payments and returns on them.

Banker’s Acceptance:

Is a money market instrument where back gives its acceptance in writing that it will give a fixed sum of money on a fixed future date. Once this formality is through it becomes a negotiable instrument. These money market instruments are used for making money available for foreign transactions. The acceptances of maturity of such instruments are likely to fluctuate between one to six months.

Repurchase Agreement:

Also known as buybacks, these are Treasury securities bought from a dealer under an agreement that they will be sold back at some (predefined) future date for a better value. This type of money market security is amongst the most liquid, (easily convertible into cash) of all money market securities and it ranges anywhere from just one day to a few months. In many ways Repurchase agreements are comparable to bank deposit accounts, and there are many large corporations which strike an arrangement with their banks to transfer excess cash to these funds on an ongoing basis.

So these were various types of money market securities. To check which will suit you best, you will need to learn about them in further detail, getting familiar with various aspects related to each of these instruments. The more you read and absorb, the deeper understanding you will develop and all this information will finally reflect in trades you strike; or advice your offer your clients; or the way you mentor your pupil.

Whatever that you do, make sure you do it to the best of your ability, with best intention, and utmost honesty.

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By The LuckScout Team

I don't believe in luck. I believe in sweat. The more you sweat, the luckier you get.

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