Each time investors are hit with a recession (as they are being hit, as we speak), they begin to understand the value of fixed-income securities and the relatively low-yield, low-interest, but extremely lucrative security they provide in times like these. To get a firm understanding of Money Markets, we first need to look at the structure of the financial markets themselves.
The financial markets are broadly classified into two types based on the time frame of the funding in question -- long-term financial markets and short-term financial markets. The long term financial markets are helped sustained by the capital markets (debt and equity) while the short term markets are kept afloat by short-term markets (Money markets and cash markets).
Most people misconstrue Money Markets to be the same as the Bond Markets. Money Markets are certainly a subset of the fixed-income securities of which bond markets are a subset too. However, Money Markets are those investments which are extremely short-term, liquid and mostly consist of IOUs issued by governments, companies or large financial institutions.
Since the borrowing and lending in the money markets is short-term, high-volume and has a very low-risk profile, the typical trading values of investments are very high. Now, because these are high-volume transactions, the transaction costs really do mount up and hence these instruments have a very high transaction cost and the returns are barely “exciting”. Most companies and banking institutions use Money Market instruments for ‘parking’ their surplus funds (which are incidentally very high) overnight, over the weekend or for other such short periods of time.
The Money Market instruments are of various types and the most common ones are typically repurchase agreements; deposits and loans; certificates of deposit; treasury bills, commercial paper and more.
Money Markets have always been the playground of huge companies and financial institutions and gaining access to this market was beyond the average investor for a long time until Mutual Funds came about. Now-a-days, it is easy to gain access to these markets by digging into “Money Market Mutual Funds” which allow an average investor to rake in the high-liquidity, easy parking, low-risk returns which are made possible by the very nature of the Money Market funds.