Short-Term Profits


Hot Money

These are the funds that are under the control of the investors. When the investors control the funds in order to seek short-term profits in an active manner the fund is known as ‘hot money’. They keep an eye on the investment opportunities with interest rate that is high by scanning the marketplace for short-term returns. The ‘certificate of deposit’ is typically the short-term investment openings which are bound to attract hot money.

Certificate of Deposit

A certificate dedicated to the savings which have a maturity date that is fixed, fixed rate of interest that is specified and it is possible to issue it in any denomination apart from minimum investment requirement is known as a certificate of deposit. There is a restriction of accessing the funds before it reaches the maturity date of the investment by CD. The issuing of CDs is done by commercial banks whereas the insurance is offered by Federal Deposit Insurance Corporation. About $250,000 is issued for each individual.

A bank issues a ‘promissory note’ which is nothing but a certificate of deposit. The investors are restricted from withdrawing the money from their funds as they please because of the ‘time deposit’. The issuing of a certificate of deposit happens electronically and depending on when the original certificate of deposit will mature, it can be renewed automatically as well. As soon as the certificate of deposit reaches maturity it can be withdrawn and they can withdraw the complete principal amount and also the rate of interest that they have earned.

Despite the time deposit restriction, it is possible for the investor to withdraw their funds from CD even before it reaches maturity, however, they will have to pay a penalty to do so. The penalty that one needs to pay is known as ‘withdrawal penalty’.

The Concept of Hot Money

Banks offer comparatively short-term certificates of deposit which will have an interest rate that is more than average, therefore attracting hot money. When they see that the organization has reduced the rate of interest or there is another organization that is offering a higher rate of interest, there is the withdrawal of funds by the investors who have the ‘hot money’ following which they will transfer it to other organization that has a high rate of interest. The idea of hot money is not limited to only investment in banks. The investors have an opportunity to transfer their funds to other countries as well so that they can take the advantage of beneficial rate of interest.

Effect of Hot Money on Countries and Banks

There is a possibility of financial consequences as well as economic consequences on the countries and banks because of ‘hot money’. When there is money transferred to the country, there is an increase in the exchange rate of that country, hence it becomes financially strong, and on the other hand the country that loses the exchange rate reduces hence, it becomes financial weak. When this happens, if the withdrawal of the money is done within short notice, the banking organization will encounter a shortage of capital.