Examples of Money Market Instruments

Money market is a component of the fixed income market that is involved in short term lending and borrowing – usually less than a year. Due to the short-term maturities of financial instruments involved in the money market, these investments are typically referred to as cash investments.

Securities are issued by different financing institutions such as banks, large corporations, and governments. These financial instruments are characterized by high liquidity and therefore considered less risky compared to stocks and bonds. Due to their very conservative characteristics, money market securities offer substantially lower returns in comparison to other investment instruments.

Money Market vs. Stock Market

Money market securities are traded in large denominations. This makes it hard for individual investors to enter. Only large corporations or financially able investors are able tap into this market. However, stocks can be accessed by almost everybody, even small one time individual investors.

Another point that differentiates the money market from the stocks is the way the securities are traded. Since it is considered a dealer market, the buying and selling occurs without the need of a broker. There is risk involved in this type of transaction as the firms that participate in the trade risk using their own accounts. That is contrary to a stock exchange because brokers are paid commissions in order to act as middlemen. In addition, there is no centralized trading floor for the money market. All deals occur through electronic systems or over the phone.

How to Access the Money Market

Money market can be accessed the easy way, through mutual funds that are intended for money market use. Since it requires high denomination investments, funds are pooled from many individual investors in order to come up with enough money to access the market. However, there are other types of instruments that can be accessed directly. One example is the Treasury bills. In case the money market cannot be accessed through the instruments above, large corporations may offer other forms of access.

Other Examples of Money Market Instruments

The commercial paper is a type of global money instrument. It is an unsecured promissory note that has a maturity in the range of 1-270 days. This paper is issued by large financial institutions and corporations as to meet certain short-term financial obligations. The paper is backed by the issuer’s promise to pay for the face value of the amount at a specified date. Since this instrument is unsecured, only firms with high credit ratings can sell them.

Foreign exchange swaps are also considered money market instruments. They occur when some currency is bought at a certain price and at a fixed date and then is sold back at any point in the future. This swapping is carried out over a short amount of time because the values of currencies usually change every day. Other examples include repurchase agreements, certificate of deposit, municipal notes, short-lived mortgages, federal funds, commercial papers, and Eurodollar deposits.