What is Money Market in Financial Market | its Types of Instruments, Features & Functions

Money Market

Money market is a part of financial market, In this market the securities are traded between the institutions or investors for a short period of time. The word “Short Period of time” means that within a 12 month or 1 year but not more than 1 year. This type of market is known as “Money Market”. The participants of this market can lend money to companies, the participants may be an Institutional investors, Banks as well as Individual investor.

Suppose there is an company name “ABC LTD.” and they need to borrow some money for their business for a short term then the company can take the funds from the money market (In money market the lender may be banks or institutions) and repay it within a 12 month.

In simple words, we can say that it is a place for where the lenders or borrowers can do the activity of exchanging the funds for a short period of time is known as “Money Market”. In this market there are some instruments are there like treasury bills, certificate of deposit, commercial paper, call money etc. and so on which are traded in this market between the investors. Now let’s see these instruments in detail…

Types of Instruments in Money Market

  • Call and Notice money
  • Treasury Bills (T-Bills)
  • Commercial Bills
  • Commercial Papers
  • Certificates of Deposits

Call and Notice money

In a call money, funds are borrowed and lent between the two parties for a short period of time likewise 1 day. Example: Suppose there is a Bank A which is facing the problem of cash shortage and they need immediately cash for 1 day then the Bank A can borrow some fund from the other bank like Bank B to fulfill their cash need (Interest rate is applicable where the lender bank can decide the Interest rate). This is known as “Call Money”

If I talk about notice money, the funds are borrowed and lent between the parties for 2 to 14 days. It is known as “Notice Money”, the main difference between these two type of money is: in a call money funds are borrowed and lent for a single day or on the other the the notice money is for 2 to 14 days.

The call and notice money is also known as “InterBank Call Money Market”

Treasury Bills (T-Bills)

When a government need an requirement of fund then they can raise money from the market for a short period of time then they can issue T-Bills to the public. The issuance of T-Bills can be done by central banks, In India RBI(Reserve Bank of India) can issue T-Bills on the behalf of Government. It is a negotiable instrument which is freely transferable and also it can be issued at a discount price.

The maturity period of T-bills are: 91 days, 182 days, 364 days.

This is known as “T-bills” and also known for “Zero Coupon Bonds”

Commercial bills

Commercial bills is also known as “Bill of Exchange”. When a seller sell his product in a credit to the buyer then he can able to create a Bill of Exchange. The buyer must have to sign this bill of exchange if he buy’s his product on credit. After signing the bill of exchange it becomes trade bill which is a part of instrument.

It is a short term bill where its maturity period is generally around 1 to 6 month.

If the seller want immediate cash before maturity time then he can discounted the bill and go to the buyer bank’s. Because the buyer signed an bill of exchange then his bank can able to pay the money to the seller. This type of trade between the seller and banks via trade bill is known as “Commercial Bill”

Commercial Paper

Commercial paper is a unsecured promissory note which is issued by the the big companies or banks. It is a short term securities in which the company can issue it for a short term to the investors wherever they required a fund. This type of paper is known as “Commercial Paper”.

Generally the maturity period of commercial paper is around 15 days to 365 days.

Certificate of Deposits (CDs)

Certificate of deposits is a promissory note which is generally issued by commercial banks and financial institutions. It is basically an agreement between the banks and depositers where the depositer can deposit their money for a specific period of time and earn interest. In CD’s depositer can’t be able to withdraw their money before the maturity period. This type of deposit is known as “Certificate of Deposit”.

The maturity period of CD’s are generally around 7 days to 365 days.

Features of Money Market

  • It is a market for short term period where the funds borrowed and lent for short term
  • The maximum maturity period of this market is 1 year not more it.
  • In money market there is no broker between the investor or borrower.
  • There is no fixed geographical area.
  • There are some securities are traded in this market like : T-bills, CD’s, Commercial Paper, Repurchase agreement, Call money etc. and much more.
  • Banks, Institutions, Individuals are involved in this market as an participant.
  • In a money market there is a enough liquidity for investors

Functions of Money Market

Easy way to raise fund for a short term: In this market, government, companies, banks can easily raise fund for a short period of time where the individuals or institutions can fulfill the need of funds.

Provides liquidity and safety: There a enough liquidity in this market where if someone need to withdraw their fund can easily withdraw it before maturity date but he need to sell their securities for an discounted price. It also provide the security of funds where they can make sure that the investors fund are safe.

Economic growth: Due to fulfilling the need of funds for a short period of time it can help to make our economy boost and creates stability.

It helps government: When an government need an requirement of funds then the money market can help to fulfill their requirement.

It helps the monetary policy: Money market helps the central banks to regulate the liquidity in the economy. Due to this it is helpful for monetary policy.

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