Investment

10 Advantages of Money Market in Modern Economy

by Mahfujur Rahman

Money market has very important roles and functions in modern economies. Because of these roles, it has occupied the central position in the economy. The importance of money market is increasing day by day. In this post we will elaborate advantages and roles of money market in modern economy that made it a essential part of a country’s economy. 

Definition of Money market – What is it?

Money market is a market, where financial instruments with high liquidity and very short maturities are traded. Money market mainly used by the people who wants to do borrowing and lending normally for the short term maturities. Money market transactions are mainly happens in large amount which takes place between the companies and different financial institutions rather than the individuals. But, the individuals can invest in small amount in money market funds.

According to Nadler and Shipman, “A money market is a mechanical device through which short term funds are loaned and borrowed through which a large part of the financial transactions of a particular country or world are degraded. A money market is distinct from but supplementary to the commercial banking system.”

Money Market Institutions

  1. The Central Bank.
  2. Commercial Banks.
  3. Non-bank Financial Intermediaries.
  4. Discount Houses and Bill Brokers.
  5. Acceptance Houses.

Money Market Instruments

  1. Commercial paper.
  2. Federal funds.
  3. Eurodollar deposits.
  4. Banker’s acceptances.
  5. Negotiable certificates of deposit (CDs).
  6. Treasury bills.
  7. Repurchase agreements (repos)
  8. Municipal notes.

10 Advantages of Money Market in the Modern Economy

There are many roles of money market in economy. These many market roles work as an influencer, therefore, offers a lot of advantages. These money market functions can also be considered as the benefits. We are going to discuss 10 of those advantages and benefits of money markets:

  • Financing Trade: Money market plays a very important role in both internal and international trade. Through the bill of exchange the commercial finance is very much available to the traders.
  • Provides Funds: As a major function, money market provides short-term funds to the both public and private institutions which needs financing for their working capital requirements. Money market do these by discounting trade bills through commercial banks, discount houses, brokers and acceptance houses. By all these the money market helps the development of commerce, industry and trade within and outside the country.
  • Profitable Investment: Money market makes it possible for the banks and other financial institutions to use their surplus funds profitably for a short period. It is one of the major benefits of money market. These institutions include not only commercial banks and other financial institutions but also large non-financial business corporations, states and local governments.
  • Helps Government: The money market helps the government when they borrow short-term funds at a lower interest rates on the basis of treasury bills. On the other hand, if the government were to issue paper money or borrow from the central bank, it would lead to inflationary pressures in the economy.
  • Helps in Monetary Policy: A well-developed money market helps in the successful implementation of the monetary policies of the central bank. It is through the money market that the central banks are in a position to control the banking .system and thereby influence commerce and industry.
  • Helps in Financial Mobility: Money market makes it easier to transfer various funds from different sector to sector and place to place, these facilities of the money market helps in increasing the financial mobility of the country.
  • Promotes Liquidity and Safety: One of the important functions of the money market is that it promotes liquidity and safety of financial assets. It thus encourages savings and investments.
  • Equilibrium between Demand and Supply of Funds: The money market brings equilibrium between the demand and supply of loan-able funds. The money market does all these by allocating different savings into investment sectors and channels.
  • Providing sufficiency to the Commercial Banks: When the commercial banks face any scarcity of money they can recall their old short term loans from money market rather than going to the central bank and borrowing money at a higher interest rate.
  • Reducing the Use of Cash: Money market mostly deals with the assets that has very high liquidity. It helps to reduce the use of cash money and it is also safer to move from one place to another.

What are the Advantages of a Money Market Account?

To get access to the money market, organization needs to have an account for money market. Beside the access to the money supply, money market account has several advantages. Those benefits are explained below. 

  • Easy Accessibility: The owners of the money market account have the opportunity to access their account with ease through ATMs, checks, etc. They can see their money market account displayed whenever they bank online. One of the main advantages of having this account is its liquidity with no maturity date. It becomes convenient for the person to access money for various purposes using such an account. As long as one hasn’t surpassed his/her account’s transaction limit, money can be moved from one account to another smoothly.
  • Higher Interest Rates: The money market account’s another advantage is, it can generate more interest than any other general bank accounts including the passbook savings accounts and regular savings accounts. In spite of being the yields small at present, Federal Reserve raises interest rates which will eventually raise the market yield. Since the interest rate is compounded and credited monthly, a money market fund accumulates more profit as the account balance increases.
  • Low-Risk and Safe Investment: A money market fund is eligible to safeguard the owner’s investments and as well as to make the money at a lower risk. For example, the independent Federal Deposit Insurance Corp. covers each money market account up to $250,000 limit per account. This initiative will protect the account along with the investors against the loss of deposit. It has examined that with the help of FDIC’s creation, no one has lost their money in any of its insured financial institutions. Moreover, if someone’s money market account is associated with the credit union, then their deposits will be protected by the National Credit Union Administration.
  • Transparency: Money market account keeps the fees transparent when being charged. There are no fees allowed to subscribe or redeem from money market funds which makes the account holders relaxed to move their money in or out of the account whenever necessary.

In Conclusion

After all these discussions, it is very clear that money market is so much crucial for a country’s economy. Without the presence of a good money market there is no way to maximize the financial sector of a country.

Related

References

  • http://www.investopedia.com/terms/m/moneymarket.asp
  • http://www.preservearticles.com/201012281812/functions-and-importance-of-money-market.html
  • http://kalyan-city.blogspot.com/2010/09/money-market-concept-meaning.html