Money market – If you are an investor who wishes to explore the boundaries of financial services in Nigeria, money market is one topic that will aid you a better understanding of the industry.
When you think of financial investment, it pays to be thorough at a given instance since financial outlay is in serious context, thus every detail you need to aid your understanding of this concept has been bare.
What is money market?
Money market refers to a market arrangement where short term securities are traded (buy/sell).
Here financial instruments traded have increased liquidity with short term maturity.
You may choose to interpret it as a market that brings borrowers and lenders together.
Ideally, major trade that takes place in the money market is usually between companies and financial institutions.
Banks lend to one another as well to large companies.
Facts about money market
- In money market large volumes of short term securities/instruments are being sold
- Against the idea that it involves banks and companies, individuals can invest in this market purchasing a mutual fund, treasury bill, they may choose to open a money market account even.
- Instruments traded in this market are highly secure with minimal risk and liquid.
- The maturity period is short
- Returns may be relatively low
How money market works
The idea in this market is to invest for a short time usually within one month to 1-year, with this regard it can be said that investors who play in this market aimed at managing their short term needs or fill a short term financial gap.
Assuming a company is in need of funds to fill its short term operational cost, it may seek out funding from the market.
Who can invest in this market?
Individuals can invest in the money market, companies, banks, Federal and State governments.
Individual can buy money market funds, certificate of deposits (CDs) and treasury bills.
Individuals can invest in the money market through the banks, however brokers stand to be other channels of investment in this market.
Money market instruments
These instruments are referred to those traded at the market platform which in turn enhance the functionality of the market.
In this category we have the,
- Commercial Paper (CP)
- Certificate of Deposit (CD)
- Treasury Bills (TB)
1. Commercial Paper
Commercial paper is an unsecured and short term loan used by companies who are looking to finance a short term working capital.
Using commercial paper as a money market instrument it has a maturity window of 15 days to 1-year discounted, where the interest payable is dependent on demand and supply of liquid funds.
2. Certificate of deposit
Certificate of deposit is a savings account in which a fixed sum is deposited for a time frame which could be six months, one year, or five years, the issuing bank pays interest on such deposit.
When such CD is liquidated, the owner receives the initial amount deposited and the interest accrued/payable.
This is however one of the safest financial investment in the market, however, before making such deposit you should understand the following,
- The interest rate receivable at the end of the CD tenor
- Understand if such rate is fixed or variable
- You should know when you are expected to get the interest
- Should there be penalty for withdrawing such deposit before the due date?
3. Treasury Bills
Treasury bills are short term debt instruments with a maturity date of one year or less.
TB are the most liquid of all the market securities backed by the Federal government of Nigeria through the Central of Nigeria.
The essence here is for the government to meet its funding needs, investing in TB is recommended.
Interest on treasury bill is usually paid at investment spot, unlike other instruments where the interest will come at the maturity date.
Functions of money market securities
- Trade financing: They provide funds to local and international traders looking for a short term business financing
- Central bank policies are harnessed through the money market securities
- Rapid industry growth occasioned by adequate funding
- Provides enabling ground for commercial banks to fund their business.
What is Capital market?
Capital market is a market where long term securities are traded, the risk in Capital market is usually high, however, the returns tend to be high too.
Read also: Bill of exchange, what they are and types explained
Comparing Money & Capital market
| Short term securities are traded e,g; TB, CP,etc. | Long term securities are traded, e.g; shares, bonds |
| This is usually a low risk investment | Capital market is a high risk investment |
| Returns are relatively low | Returns in Capital market are high |
| Investment period is usually within 1-year or below | In Capital market, the investment period goes way over 1-year to 10-year |
| If you wish to invest short term, the money end is idea | Long term investors should go for Capital market |