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The money market is not a single, homogeneous market, but a combination of individual markets, each with its own characteristics and identity. For example, there is a market for federal funds, one for repurchase agreements, one for Treasury bills and notes, and so on. Because of the similarities of the instruments, however, they generally are classified in one category.

This market consists of most nonequity fixed-income securities maturing within three years (but usually within one year) that are issued, traded, and redeemed. Short-term funds that are borrowed and lent on the security of these obligations on an impersonal basis compose the second element of the market. Changes take place continuously in the types of investments, instruments, and institutional arrangements available for the investor.

Transactions in the money market do not take place in organized exchanges, but are highly dispersed. Trading in the various obligations or securities occurs almost entirely in the over-the-counter market. Like most markets, trading is not confined to bonds, notes, certificates, or bills; information and gossip about trends, events, and participants are also traded.

The primary participants in the money market in recent years have been the Federal Reserve Banks (acting both for their own accounts and for their customers, usually foreign central banks), commercial banks, financial and nonfinancial corporations of all kinds, and a large and growing number of money-market mutual funds, securities dealers, and governments. In fact, almost anyone who has funds to invest temporarily is a market participant.

The big players in the money market usually act as both borrowers and lenders. As borrowers, they issue a variety of obligations (notes, bonds, etc.) with a wide range of terms and conditions. As lenders, their basic objective is to use any temporary excess or surplus funds for profit and liquidity. Individuals participate in the market solely to take advantage of the highest available returns with little or no risk at all.

Although individuals can buy many newly issued money-market securities directly from their issuers or from firms that these issuers have appointed to handle this transaction for them, such instruments as outstanding securities and certificates of deposit must be purchased in the secondary market. For example, it is possible to subscribe for new issues of the U.S. Treasury by going to offices or a branch of the Treasury’s fiscal agents and entering such a subscription directly. Similarly, it is possible to buy newly issued commercial paper directly from certain corporations that are organized for that purpose.

Most individuals, however, find it more convenient to have their bank or stockbroker handle this transaction for them for a small fee. But if an individual wishes to buy a money-market security that is already outstanding, he must buy it from a dealer who makes a market in the security in question. These dealers provide liquidity by being willing to buy outstanding issues, which they then attempt to re-sell at a slightly higher price.

Rates, instruments, and arrangements shift continuously in this highly flexible market, so the astute trader can capitalize immediately on minute shifts in financial conditions. And more defensive investors can find some measure of safety, parking funds while riding out rough spots in the economy.

The key to profiting from the money market is to understand the forces that affect rates. This, along with a fundamental comprehension of the array of investment instruments and their relative yield positions, can help both the sophisticated and defensive investor identify good opportunities.

Happy Trading.


Jeff Neal 
Senior Writer, Options Strategist & Profit Strategies Radio Show Market Correspondent
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Listen to Jeff at www.ProfitStrategiesRadio.com

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