Market for money or money market is a part of financial market where different financial instruments of high liquidity and short maturities are traded. Market for money emerges because some parties lack money while other has surplus. So both parties used to lend and borrow money from each other within a short period of time consisting several days up to a year. Money market traders use to trade with short term financial instruments commonly known as papers. Some of many financial instruments are certificate of deposits (CDs), commercial papers, municipal notes, federal funds and repurchase agreements (repos). Capital market and money market are two major part of market for money. But there is a basic difference between these two. In capital market share or securities of various companies are being traded. Investor can hold their stock as long as they want and can sell at a profitable price. But in money market companies use to borrow money from lenders by selling commercial papers in order to raise fund. These papers are short termed and mature in between 13 months at most.
Market for Money – Functions
If you are a business person who deals with stocks then money market will also be a suitable area of your investment. You can utilize your idle money investing in market for money. It will increase your money within a short time. But before investing you need to know where you are going to invest – either it’s a government treasury fund bill or fund raising commercial paper for a new company. Market for money plays a vital role in the growth of economy as it increases the liquidity of the market. It helps to implement monetary policy and transfers a large amount of money. It also allows government to raise fund and at the same time determine short term interest rates.
Market for Money – Demand & Supply
Inside the market for money the demand and supply for money determines the rate of interest. Again two factors affect the demand and supply curve to shift in market for money – Income effect and Price level effect. A higher level of income causes the demand for money increase and the demand curve to shift to the right. A rise in the price level also increases the demand for money and the demand curve to shift to the right. An increase in the supply for money monitored by the Federal Reserve shifts the supply curve for money to the right. Interest rates will rise when income in a business cycle expansion is rising. Again keeping the supply for money and other economic variables constant when the price level increases, interest rate also increases. On the contrary an increase in money supply declines the rate of interest. Thus market for money always changes its value of interest with the relation of demand and supply curve.
Market for Money – Conclusion
Market for money plays a vital role in modern economic growth. Today all the trades can be observed and monitored online. So now it’s a hassle free sector of investing money and at the same time it helps new business to give a scope to bloom. Without money market it is almost impossible to create new business and opportunities. Money market helps money to flow hand to hand. Interbank transfer occurs because of the existence of money market and the lack of demand and supply of parties. It also keeps the liquidity of the market to a stable situation. In every country the central bank determines the monetary policy for that country and applies rules and regulations for local banks. Thus fare and transparent transaction of money is ensured. In order to do business in a particular country, you need to know the rules and regulations as well as the market policy of that country. The market system in Europe is a little different from the States. For example while US encourage their consumers to invest in money market fund, EU discourage investors to invest in money market fund by its guideline. It’s up to you where you want to do your business and what investment policy you will choose for the very success of your business. But before that you need the study the present economic situation in order to become successful.