Money Market: Definition, Functions & Advantages

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What Is Money Market?

The money market is a financial market for trading in shortterm financial assets. It consists of individuals (and organizations) who wish to lend out money on a short term and those who wish to borrow. It is therefore a market for short-term loans and investment.

Money Market
Money Market

Financial institutions which operate in the money market include the central bank, commercial banks, acceptance houses, etc.

The instruments used in the market for transferring money between lenders and borrowers include treasury bills, bills of exchange, call money fund etc.

Participants in the money market usually enter the market either to raise funds or to convert temporary cash surplus into highly liquid interest-bearing instruments. Funds may be raised either by borrowing outright or through selling of new instruments.

The majority of African countries money markets is under-developed when judged by the size and amount of instruments dealt with and the basic trading machinery.

Functions of the Money Markets

The main functions of money markets are:

  • Provision of circulating capital for commerce and industry.
  • Offering investment opportunities on a short-term basis for people and organizations to enable them earn interest.
  • Provision of investment advice to customers.

Advantages of Money Market

  • Money market enables investors to meet up with their short-term financial need by borrowing from the market.
  • It provides opportunity for others who have funds in excess of their immediate requirement to save and secure such funds rather than keeping it at home.
  • The opportunity cost of keeping funds outside the financial system is the interest foregone. Therefore, the money invested in a money market yields extra income in the form of interest.
  • Funds invested in the money market can be recalled at short notice for other purposes.
  • The market promotes economic growth and development.
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