A common interpretation of the term “hot money” refers to money associated with the commission of an illegal activity, especially theft. This money has usually been marked or has been made easier to identify. Banks may use specially-marked or easily identifiable money in the event of bank robberies. This makes it much easier for the criminals to be traced.
However, in a more financial context, hot money is that which is transferred quite quickly from one place to another or from one specific investment to another. Such is done with the objective of maximizing profits as brought about by changes in interest rates. By moving the money among these investments quickly, investors are able to take advantage of the highest interest rates available, and therefore maximize profits.
Some investors prefer improving their investment portfolio slowly but surely by making use of long-term investment strategies. However, there are those who prefer to make profits over a much shorter period of time. It is quite logical for such investors to look for the best deals in the market, so they place their money in short-term investments, which could last over a few months to a year. After the investment has matured, the money is withdrawn and quickly placed into another short-term investment which offers the best interest rate.
Some investors may even chose to move their money from one country to another, instead of simply taking advantage of the different investment opportunities in one country. When this happens on a large scale, this may affect the value of a country’s currency. As such, countries may set some limits in place in order to minimize the negative effects of such movements in currency.