Money markets are defined as organized exchanges of funds. This allows participants to lend and borrow money for a maximum of a year. These markets were popularized on two fronts. The first is the individual investor who wants to be able to invest a smaller amount of money while being able to take advantage of considerable safety and liquidity. The second front is that of governments, banks, and other businesses who have found this to be an efficient way to transact funds.

Purpose

The main reason for money markets is to generate money. This is true for both the public and private sectors. The attraction for most investors is the short-term maturity of money markets that range from 24 hours to a full year. However, the norm is approximately three months. It is possible for investors to sell their investments before the maturity, but they will lose the interest they could have earned if they had waited for them to mature.

Markets are traded in secondary markets as well. Secondary markets are where investors buy and sell securities and assets from investors as opposed to the issuing organizations. While there is a loose association of these markets in New York City, these centralized markets really do not have a centralized location.

Types of Instruments

Most products are specialized which means they are routinely traded with large finance organizations and banks who have a better understanding of the money market. Common money market instruments include: futures options and contracts, discount window, shares in market instruments, federal funds, repurchase agreements, and negotiable certificates of deposits.

Other products also include: commercial paper, short-term municipal securities, mutual funds, and bankers’ acceptances.

Short-Term Investment Pools

Short-term investment funds of local government pools, bank trust departments, and money market mutual funds are all included under the umbrella of short-term investment pools. They combine different money market instruments. As a result, highly specialized money market products available and understandable to traders do not possess the knowledge required for these instruments. One other benefit is that the minimum of $100,000 is not required unlike it is to purchase other money market products. 
Money market mutual funds are operated by bank trust departments and are an assessable short-term investment pool. This type of mutual fund is either classified as taxable funds or taxable exempt funds. Tax-exempt funds are free from all federal tax because the money is invested in securities that are issued by local and state governments. Taxable funds are securities investments which include commercial papers and treasury bills; his requires investors to pay federal tax.

Eurodollars

The term Eurodollars is a bit deceiving, because it does not have much to do with Europe. They are actually United States dollars that are deposited in banks outside America. They get their name from the evolution of the market in Europe, but can be held in any country around the world. Banks benefit from them because they can be operated on a narrow margin and are somewhat regulation free. This means banks can circumvent the costs associated with regulations. One of the drawbacks of Eurodollar deposits is that they tend to require millions and it reaches maturity in several months. For this reason, the largest organizations have the ability to attain the Eurodollar market. This type of investment has less liquidity than other money markets, although they do offer higher yields.