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Money Market

The money market is a place where big players manage their short term cash investments. It specializes in trading short term debt securities. It is a profitable market, and it offers investments at little or no risk. What is the money market? What makes it an attractive investment? What tools can you use to invest in the money market? Who invests in the money market and why? What are the advantages and disadvantages it offers? These are just some of the questions addressed in this article.

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The Different Types of Investment Tools Found In Money markets

The worst way to save cash is to leave it in the money box. While you can ensure that you still have enough money for future expenses, you are not improving your financial stature because your money is not earning interest. In the end, your money will only lose its value, and you won't have enough to buy your needs because of the increasing inflation.

This is why businesses enter the money market to temporarily invest these reserved funds and profit a little from them. Though bonds and long-term debt investments are excellent securities to grow cash, money market securities provide liquidity that these investments do not provide. This means that market securities deal with short term investments or investments that mature in less than a year. Businesses invest on this type of cash to maximize their earnings even in a short while. And even though the investments have lower returns than other securities, it proves to have positive effects in the company cash flows and provides immediate cash supply when there's a sudden need for outlays.

Opening a mutual fund or a bank account is the best way to gain access to the money market. With these accounts, investors all over the world flock in the money market and easily obtain the securities through them.

One major money market security is the Treasury bill, or simply called T-bill. This is one of the safest investment tools used in the money market but it offers lower returns. T-bills provide simplicity and affordability and are offered by the U.S. government to raise its revenue. They are issued in three types of term: three months, six months and one year. The shortest term T-bill is considered as a cash equivalent making it the most liquid of the three and can be part of a business cash account. The T-bills are purchased at less than par value or at a discount and upon maturity; the government pays the investor the par value, thus the earnings are computed by deducting the purchase price from the par value of the T-bill. The best thing about T-bills is that they are risk-free, with the government as the debtor, investor will be returned fully with their invested capital plus returns.

Another type of money market securities is the commercial paper. It is an unsecured loan that is issued by a corporation for financing accounts receivable and inventories. The purchase price of commercial papers is based on current market interest rates and is usually at a discount. It is a safe kind of investment because it is issued by companies with excellent credit worthiness. The denominations of commercial papers are also large in amount, such as $100,000 or more.

Certificate of deposit or CD is another secured investment. This is a type of investment which that has a maturity date and earns interest during the term. The terms of CDs vary. It may take a month up to ten years to hold a CD. Two rates are taken into consideration when choosing a high yielding CD. The annual percentage yield (APY) and the annual percentage rate (APR). APY is the rate used to compute the total earnings and uses the compounding method of interest. APR is the nominal rate that determines the earnings without compounding the interest.

Other money market securities include banker's acceptance, repurchase agreements and Eurodollars.

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