Hot Money: What it is, How it Works, Impact

By
Chizoba Morah
Full Bio
Chizoba Morah is a business owner, accountant, and recruiter, with 10+ years of experience in bookkeeping and tax preparation.
Learn about our editorial policies
Updated July 24, 2022
Reviewed by
Somer Anderson
Somer G. Anderson
Reviewed by Somer Anderson
Full Bio
​Somer G. Anderson is CPA, doctor of accounting, and an accounting and finance professor who has been working in the accounting and finance industries for more than 20 years. Her expertise covers a wide range of accounting, corporate finance, taxes, lending, and personal finance areas.
Learn about our Financial Review Board
Fact checked by
Diane Costagliola
Diane Costagliola
Fact checked by Diane Costagliola
Full Bio

Diane Costagliola is a researcher, librarian, instructor, and writer who has published articles on personal finance, home buying, and foreclosure.

Learn about our editorial policies

"Hot money" refers to funds that are controlled by investors who actively seek short-term returns. These investors scan the market for short-term, high interest rate investment opportunities. A typical short-term investment opportunity that often attracts "hot money" is the certificate of deposit (CD).

How Does the 'Hot Money' Concept Work?

Banks usually attract "hot money" by offering relatively short-term certificates of deposit that have above-average interest rates. As soon as the institution reduces interest rates or another institution offers higher rates, investors with "hot money" withdraw their funds and move them to another institution with higher rates.

The "hot money" concept is not reserved solely for banks. Investors can move their funds to different countries to take advantage of favorable interest rates.

The Impact of 'Hot Money' on Countries and Banks

"Hot money" can have economic and financial repercussions on countries and banks, however. When money is injected into a country, the exchange rate for the country gaining the money strengthens, while the exchange rate for the country losing the money weakens. If money is withdrawn on short notice, the banking institution will experience a shortage of funds.

(To read more about CDs, see Step up Your Income With a CD Ladder.)

Take the Next Step to Invest
×
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.