Money market is a market for short term loans or financial assets. It is a market for the lending and borrowing of short term funds. As the name implies, it does not actually deal in cash or money. But it actually deals with near substitutes for money or near money like trade bills, promissory notes and Government papers drawn for a short period not exceeding one year. These short term instruments can be converted into cash readily without any loss and at low transaction cost.
Money market is the centre for dealing mainly in short term money assets. It meets the short term requirements of borrowers and provides liquidity or cash to lenders. It is the place where short term surplus funds at the disposal institutions and individuals are borrowed by individuals, institutions and also the Government.
The money market does not refer to a particular place where short term funds are dealt with. It includes all individuals, institutions and intermediaries dealing with short term funds. The transactions between borrowers, lenders and middlemen take place through telephone, telegraph, mail and agents. No personal contact or presence of the two parties is essential for negotiations in a money market. However, a geographical name may be given to a money market according to its location. For example, the London money market operates from Wall Street. But, they attract funds from all over the world to be lent to borrowers from all over the globe.
II. DIFINITION
The money market is the collective name given to the various firms and institutions that deal in the various grades of near money.
III. FEATURES
The following are the general features of a money market:
•It is a market purely for short term funds or financial assets called near money. •It deals with financial assets having a maturity period up to one year only. •It deals with only those assets which can be converted into cash readily without loss and with minimum transaction cost. •Generally transactions take place through phone i.e., oral communication. Relevant documents and written communications can be exchanged subsequently. There is no formal place like stock exchange as in the case of a capital market. •Transactions have to be conducted without the help of brokers. •It is not a single homogenous market. It comprises of several submarkets, each specializing in a particular type of financing. Example, call money market, acceptance market, bill market and so on. •The components of a money market are the central bank, commercial banks, non-banking financial companies, discount houses and acceptance houses. Commercial banks generally play a dominant role in this market.
Objectives
The following are the important objectives of a money market:
a.To provide a parking place to employ short term surplus funds. b.To provide room for overcoming short term deficits. c.To enable the central bank to influence and regulate liquidity in the economy through its intervention in this market. d.To provide a reasonable access to users of short term funds to meet their requirements quickly, adequately and at reasonable costs.
Characteristic features of a developed money market
In order to fulfill the above objectives, the money market should be fully developed and efficient. In every country of the world, some type of money market exists. Some of them are highly developed while others are not well developed. Certain essential features of a developed money market. They are as follows:
a.highly organized banking system b.presence of a central bank c.availability of proper credit instruments d.Existence of sub-markets e.Ample resources f.Existence of secondary market g.Demand and supply of funds
Importance of money market
A developed money market plays an important role in the financial system of a country by supplying short term funds adequately and quickly to trade and industry. The money market is in integral part of a country’s economy. Therefore a developed money market is highly indispensable for the rapid development of the economy. A developed money market helps the smooth functioning of the financial system in any economy in the following ways:
a.development of trade and industry b.development of capital market c.smooth functioning of commercial banks d.effective central bank control e.formulation of suitable monetary policy f.non-inflationary source of finance to Government
IV. COMPOSITION OF MONEY MARKET
As stated earlier, the money market is not a single homogenous market. It consists of a number of sub-markets which collectively constitute the money market. There should be competition within each sub-market as well as between different sub-markets. The following are the main sub markets of a money market:
a.Call money market – The call money market refers to the market for extremely short period loans, say one day to fourteen days. These loans are repayable on demand at the option of either the lender or the borrower. As stated earlier, these loans are given to brokers and dealers in stock exchange. Similarly, banks with surplus funds lend to other banks with deficit funds in the call money market. Thus it provides an equilibrating mechanism for evening out short term surpluses and deficits. Moreover, commercial banks can quickly borrow from the call market to meet their statutory liquidity requirements. They can also maximize their profits easily by investing their surplus funds in the call market during the period when call rates are high and volatile. b.Commercial bills market or discount market – A commercial bill is one which arises out of a genuine trade transaction, i.e., credit transaction. As soon as goods are sold on credit, the seller draws a bill on the buyer for the amount due. The buyer accepts it immediately agreeing to pay the amount mentioned there in after a certain specified date. Thus a bill of exchange contains a written order from the creditor to the debtor, to pay a certain sum, to a certain person, after a certain period. A bill of exchange is a self liquidating paper and negotiable. It is drawn always for a short period ranging between 3 months and 6 months. c.Acceptance market – The acceptance market refers to the market where short term genuine trade bills are accepted by financial intermediaries. All trade bills cannot be discounted easily because the parties to the bills may not be financially sound. In case such bills are accepted by financial intermediaries like banks the bills earn a good and reputation and such bills can be readily discounted anywhere. In London, there are specialists firms called acceptance houses which accept bills drawn by traders and impart greater marketability to such bills. However, their importance has declined in recent times. d.Treasury bill market – Just like commercial bills which represent commercial debt, treasury bills represent short term borrowings of the Government. Treasury bill market refers to the market where treasury bills are brought and sold. Treasury bills are very popular and enjoy a higher degree of liquidity since they are issued by the Government.
Unless you have spent the past couple of months hiding away in a cave, you are aware that a huge number of home mortgage loans have ended up in default and even in foreclosure. Indeed, some states in the country are experiencing a record rate of mortgage foreclosure filings. In addition to problems associated with credit and lending, the stock market has been a bit bearish itself. The combination of these two factors has caused a significant amount of concern amongst economic, financial and fiscal experts and consumers.
The Federal Reserve actually has been rather proactive in working to ensure that the problems do not have any more adverse effect on the banking industry and by extension on business owners and consumers across the country. In this regard, the Federal Reserve actually has pumped nearly $80 billion into the banking system during two weeks in August.
Understanding what actions the Federal Reserve has taken, you may be wondering and why this helps the banking industry and how it will also have a positive effect on businesses and consumers alike. In order to understand the benefits of what the Federal Reserve has done this month, it's important to have at least a basic understanding of banking regulations and practices in the United States.
The primary regulation that you need to understand is that banks in this country are required by law to maintain at least 20% of their deposits in cash. Because of this requirement, at the end of each banking day, if a bank does not have the necessary amount of deposits in cash, the bank itself must borrow money from other banks. This type of borrowing needs to take place to ensure that the bank has an appropriate cash deposit balance at all times.
The amount of interest that is charged on these types of inter-bank loans is known in the industry as the overnight lending rate. Absent the infusion of money references a moment ago that was undertaken by the Federal Reserve, the amount of money available to banks to ensure their cash deposit balances would have been tighter resulting in higher interest rates that the banks would have to pay to obtain the cash they needed to ensure proper maintenance of their cash deposit balances.
Had this tightening occurred, banks would then have to cover their own reserves by cutting back on the money they otherwise would make available for lending purposes to businesses and consumers alike. The net effect of that would have been an even more significant impact on the economy overall beyond what has already occurred due to the mortgage foreclosure and stock market uncertainty related issues.
In the end, the actions of the Federal Reserve in this instance does appear to have the desired effect of avoiding a further restriction of the amount of money available for lending purposes to both businesses and consumers alike. Moreover, this has helped to hold off even more serious economic problems at the present time and into the more foreseeable future as well.
Both Ts Saraswathi & Lance Mohr are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Lance Mohr has sinced written about articles on various topics from Real Estate, Mortgage and Environment. Lance Mohr is your Tampa real estate expert, with over 10 years of experience in real estate sales and 18 years of investing. He holds a real estate broker license in the state of Florida, and is a member of top relocation firms. Lance can be reached at l. Lance Mohr's top article generates over 5400 views. to your Favourites.