If you visit your financial adviser, one of the best financial advice you’ll possibly get is to invest your money to earn higher interest rates. By doing that, your money will work for you while you watch it grow.
There are countless investment options available to Canadians, including tax-free savings (TFSA), high-interest savings (HISA), retirement savings plans (RRSP), guaranteed investment certificates (GICs), and more. However, we want to take a look at one of the lucrative investment ideas to make a substantial amount of money – the Money Market.
Money Market investments are usually short-term funds, a year or less, and are considered safe investments.
About the Money Market
The Money Market is a section of the economy or the financial market where participants and financial institutions can borrow or lend for a short period, usually less than a year. Money Market as an investment option enables government, banks, and large corporations to raise capital by selling short-term securities to finance their cash flow needs.
The Money Market comprises securities such as government bonds, short-term mortgages, commercial paper, bills of exchange, and more. Individual investors can also invest their money in the Money Market for short-term investment at a competitive fixed rate of return.
How Money Market Works in Canada
Money Market as an investment in the financial market is designed for short-term investment goals, usually within 12 months or less. Money Market investments are among the many ways the government and large corporations control money flow and raise enough money for their projects. Government and corporate bodies use the Money Market to accumulate and transfer large amounts of money.
Contrary to some people’s assumptions, private investors can also leverage the potentials embedded in the Money Market investment. It can be a suitable start for your investment journey when you place your money in a short-term business before considering a long-term investment decision.
Money Market yields are fixed and mostly higher than what traditional savings accounts offer as interest rates. As a result, you will know how much your investment will yield as returns at the investment term’s maturity.
The Canadian Money Market is made up f several financial players and participants, including financial institutions, corporations, and financial market dealers who wish to borrow or lend to/from investors. Participants borrow or lend for a fixed term at a fixed interest rate.
Money Market Instruments
Money Market instruments are securities that government bodies, corporations, banks and large businesses rely upon for short-term capital. The term is typically less than a year (usually in months, weeks, days, or even overnight).
Money Market instruments are of different types, each designed to meet investors’ or businesses’ specific needs. Some Money Market instruments are also designed for only banks and large financial institutions and cannot be obtained by other business corporations.
The following are some of the Money Market instruments in Canada:
Treasury Bills are usually considered the safest Money Market instrument. They are issued by the Federal Government or Provincial Governments, with a full guarantee and governmental backing to refinance government deficits and raise money for the government.
The Government of Canada Treasury Bills are fully guaranteed by the Canadian Federal Government and are available in US dollar and Canadian dollars. Also, the Provincial Treasury Bills are fully guaranteed by the issuing provincial government.
The principal and interest is a direct obligation of the Canadian Government or provincial government, regardless of your investment value. Treasury Bills are considered viable content within your RRSP and RRIF.
Treasury Bills come with a maturity of one to twelve months, and earnings are distributed at maturity. They are typically purchased by insurance companies, broker-dealers, large institutions, individual investors, banks, pension funds, etc.
Commercial paper is a short-term investment promissory note or unsecured loan issued by large corporations to finance short-term cash flow needs. They provide high yield value for short-term investments. It has a fully guaranteed principal and returns at maturity, as corporations usually issue it with high credit ratings. Individual investors can invest in Commercial Paper through Money Market funds.
Repurchase Agreements are short-term loans that involve selling securities to an investor with an agreement to repurchase them at an agreed or fixed price (usually higher) at a later date. Sometimes the government buys a Repurchase agreement to regulate bank reserves and money supply in the economy.
Bankers Acceptance is a short-term promissory note or debt issued by big corporations or firms and guaranteed by a Canadian chartered bank. It offers a high return at maturity. It is usually used for international trade in which the bank is assuming the responsibility for payment.
Certificate of Deposit
Banks issue a certificate of deposit to raise short-term funds. The holder of the Certificate of Deposit gets a high-interest rate at the maturity date.
Functions of the Money Market
- The Money Market contributes to the development and stability of the Canadian economy by providing short-term liquidity to the government, banks, and other large establishments.
- It provides an avenue for investors with excess money to invest their money and earn interests.
- Individual investors who have sold their RRSP or TFSA can use the Money Market as a suitable investment to earn short-term interests while planning for future investments.
- It provides financing to local and international traders in need of urgent funds.
- Small businesses can easily obtain short-term loans to finance their immediate needs, such as paying employees or getting raw materials.
Participants Involved in Canadian Money Market
The Canadian Money Market is made up of different participants and investors.
The following are the groups involved in the Canada Money Market:
- The Government of Canada as the issuer of securities.
- The Bank of Canada as the issuing agent for the Canadian government and a large holder of money market instruments.
- The Chartered banks as large holders of money market instruments. Chartered Banks also distribute, buy, and sell money market instruments to individual investors from time to time.
- The Security Dealers as traders of securities.
- The provincial or territorial governments and large corporations as short-term investors.
- Individual investors, as short-term investors through their money market funds.
Alternatives to Money Market
Depending on your investment need and goals, there are several alternatives to the money market. Some of the options also offer similar or higher interest rates.
Below are some of the alternatives to the money market that you can consider for short-term investments:
- Exchange-Traded Funds (ETFs)
- Money Market account
- High-Interest Savings account
- Precious Metals Certificates
- Guaranteed Investment Certificates (GICs) and Term Deposits
Money Market FAQs
How can I invest more than one year in Money Market?
Money Market investment products are short-term, designed for twelve months or less. If you want a long-term investment product, you should consider fixed-income investments.
Are Canadian Money Market funds safe?
Money Market investments are generally considered safe investments, though they are not insured by the Canada Deposit Insurance Corporation (CDIC). The Money Market funds are issued by the government and corporate establishments, hence of high quality and a safe place to keep your money.
What do I stand to gain in Money Market investment?
Money Market investments offer different attractive benefits to investors with different needs. Money Market is suitable for short-term investment goals with easy access to your money at any time during the term of your investment. Money Market is safe with a higher return than traditional savings.
Is a money market account different from money market funds?
A money market account is different from a money market fund. Investment companies provide money market funds and are not insured by the CDIC. A money market account is a special investment account offered by banks and other financial institutions, and the CDIC usually insures deposits.