Investing and Financial Management.
MONEY MARKETS :
DEFINITION:Investments offering easy access to money, but with a higher rate of return than checking and savings accounts.
PROS:Higher interest rate than with checking or savings accounts; limited check writing; easy access to money; very safe
CONS:Not meant to be a long-term investment; interest rate may fluctuate; may need larger amount for initial deposit
Money market accounts and funds give you easy access to your money, but with a higher rate of return than traditional checking and savings accounts. For that reason, they are ideal places to keep money that you are saving for an emergency, money you plan to need in the short-term, or money that you are planning to invest at a later date.
You can open a money market accounts through banks, brokerage firms, and mutual fund companies.
Types of Accounts
Different types of financial institutions offer their own versions of money market accounts. These different forms of money market accounts may be offered through three sources:
- investment companies
Banks: Money Market Deposit Accounts
At many financial institutions, savings accounts have given way to money market deposit accounts. The money market deposit account through your bank gives you ready access to your money and pays a higher interest rate than traditional savings accounts. You may find that you’ll receive a higher rate of interest if you deposit a larger amount.
Brokers: Cash Management Accounts
When you’re ready to buy and sell stocks, you will need to open a brokerage account. You set up an account with a brokerage firm, which is also known as a broker-dealer. Typically, you will set up a cash management account to pay for your investments and to stash the proceeds from any you’ve sold.
Brokerage firms offer cash management accounts that earn money market interest rates. The cash management account has a number of benefits:
- You can keep your savings there and may be able to earn competitive interest rates.
- You can use it as a brokerage account to buy and sell investments through that firm.
- You are often entitled to checking account privileges, a debit card and a line of credit.
You might pay high fees to maintain a cash management account at a brokerage firm. These fees are sometimes waived if your account is large or you meet other criteria established by the broker-dealer.
Investment Companies: Money Market Mutual Funds
Just as you and your friends throw your money in a pot to buy pizza, mutual funds pool the investments of thousands of investors. Each mutual fund has a manager or a team that invests your money in accordance with the fund’s objectives.
Almost all money market mutual funds have these features:
- They invest short-term in extremely safe investments.
- Your rate of return fluctuates as interest rates go up and down
- Your principal is extremely safe, though it is not guaranteed by the FDIC
- You have ready access to your funds.
Money market funds are viewed as a cash equivalent investment. In other words, the value of each share stays at $1 and does not go up or down as it might with other kinds of mutual funds.
What are the Differences?
With every kind of money market account, the interest rate you receive is based in part on how high or how low interest rates are. The interest rate on brokerage cash management accounts and money market mutual funds is likely to change slightly each day as new investments are bought and sold. The money market deposit account through your bank usually offers a specified interest rate for a defined period of time. For example, the interest rate through your bank may only be guaranteed for the next 90 days.
The biggest difference between a money market deposit account through your bank and one through a broker or mutual fund company is safety. The money market account through your bank is protected by the FDIC, unless you have more than $100,000 in that financial institution. Nevertheless, brokerage cash management accounts and money market mutual funds are almost as safe. The Securities Investor Protection Corporation (SIPC) protects you if the brokerage firm holding your money goes out of business. The SIPC is not, however, the equivalent of the FDIC and does not protect you if your investment goes down in value.
- Fiat Money
- Bank Notes and Reserve system
- Stock Market Investing
- Bubbles in Market
- Financial Market
- Predicting patterns in Market
- Fat tail Options
- Tips Money Markets
- Checking Accounts
- Managing Money
- Mutual Funds
- Retirement Funds
- Saving Accounts
- Tips Checking Accounts