Money Markets

Money Markets Explained

9 min read

Money markets are our safe liquid investments well-suited to the small investor. They typically invest in steady funds such as treasury bills and commercial paper. 

In a nutshell, they provide a means for lenders and borrowers to satisfy their short-term financial needs. Mostly, they provide those with funds—banks, money managers, and retail investors—a means for safe, liquid, short-term investments. And on the flip side, they offer borrowers—banks, broker-dealers, hedge funds, and nonfinancial corporations—access to low-cost funds. 

Money market accounts are similar to savings accounts in that you earn interest on the money you deposit. But remember that these aren’t accounts meant for everyday spending, like your checking account. 

They don’t offer as much liquidity as checking accounts—the number of transactions you can make per statement cycle is often limited. But they tend to provide more access to your cash than a savings account.

5 Second Takeaway

  • The term money market is an umbrella that covers several types of secured transactions, which vary according to the needs of the lenders and borrowers. These markets are described as “money markets” because the assets bought and sold are short-term—with maturities ranging from a day to a year—and normally are easily convertible into cash. 
  • According to the Federal Reserve Board’s Flow of Funds Survey, money markets account for about one-third of all credit.
  • It is different from a 401(k) plan.
Money Market

What Is Cash?

The term cash is used rather loosely. Sometimes, it refers to cold hard cash stored in your mattress; other times, it’s the money in your checking and savings account. 

As far as the investing world is concerned, cash typically describes funds held in money market accounts. These relatively low-risk investments pay a small amount of interest, usually once per month. 

What Are the Different Types?

  • Bank accounts, including term certificates of deposit
  • Interbank loans (loans between banks)
  • Money market mutual funds
  • Commercial paper
  • Treasury bills
  • Securities lending and repurchase agreements

The Risks

The chief purpose of the MM is liquidity, giving you instant access to your funds. Some use it to pay for expenses, while others might use it to move in and out of investments like stocks or bonds.

The MM allows its participants access to short-term debt, which can be used to fund short-term cash flow requirements.

They are liquid and low-risk because they invest in short-term debt such as treasury bond bills, commercial paper, and repurchase agreements, among other investments. 

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Money Market Withdrawals

Fairly quickly. That’s because most of these investments mature in less than one year, and, on average, the maturities are short 60 days or less.

 This means that investments are constantly maturing and replacing to limit loss exposure. While these investments are maturing and being replaced, they pay small interest payments and offer investors ample liquidity. 

However, remember these investments are exposed to risks similar to other debt investments, such as changing interest rates. Let’s now turn to one example: the money market mutual fund. 

Money Market Mutual Funds

Unlike other mutual funds that invest in stocks and bonds and fluctuate in price, certain money market funds don’t. Most seek to maintain a stable price of one dollar per share and pay a small interest payment once monthly. 

The interest payments of this fund are typically slightly higher than similar savings vehicles, such as checking and savings accounts. But with a money market fund, interest rates are usually variable, which might increase or decrease. 

With a slightly higher interest rate comes slightly more risk. This distinction between MM funds and checking and savings accounts is important. 

Although rare, sometimes you can lose money in a money market fund. As you may or may not know, this happened during the 2008 financial crisis.

Their management fees are another aspect that sets money market funds apart from traditional savings accounts. Even though the management fees are small and form an expense ratio, it’s still a drawback.

Taxable vs. Non-Taxable Money Market Funds

Even though there are many types of money market funds, they’re generally divided into taxable and non-taxable. As the labels suggest, returns from taxable funds are subject to tax. On the other hand, interest from non-taxable funds may be exempt from certain taxes.

 Non-taxable funds generally invest in short-term minutes for securities. But before investing in a non-taxable fund, you’ll want to check with your accountant or state taxes to ensure they find you’re considering qualifying for tax exemption.

Goal of a Money Market Fund

A money market fund aims to limit losses and pay small interest. However, one drawback of these funds is that interest paid may not be cut past inflation. This means your cash may lose value. But you will know I’ve asked him as 100% safe. MM funds are among the lowest-risk investments. 

Advantages of a Money Market

Flexibility. Many money market accounts come with checks and debit cards. What this means is that you can withdraw your funds.

Interest. Like savings accounts, you earn interest on the money deposited in MM accounts.

Low Risk. Money held in accounts backed by the Federal Deposited Insurance Corporation or the National Credit Union Share Insurance Fund is protected. 

Disadvantages of a Money Market

Transaction restrictions. Even though I mentioned they come with checks and debit cards, the number of transactions allowed per month is capped.  

Interest rates. They aren’t the best, nor are they fixed. This means it can go down. Alternatively, If you’re looking for a fixed rate of return, you may want to consider certificates of deposit (CDs) or another product.

Best Money Market Accounts

When shopping for an MM account, the best will offer you high-interest rates with low fees and minimum cash requirements. Many, though not all, also provide easy access to funds. This allows you to write checks easily – is that even a thing anymore – and make debit card transactions from the account. 

Below is a list of some of the best accounts.

1. Connexus Credit Union High Yield Money Market Account

  • no monthly fee
  •  0.25% annual percentage yield for balances between $1,000 and $19,999.99 
  •  no penalty if your balance falls below $1,000, but you don’t get dividends if this happens

2. Quontic Bank Money Market Account

  •  no monthly fee
  • $100 minimum deposit to open the account
  •  1.85% annual percentage yield applies to all balance tiers

3. Sallie Mae Bank Money Market Account

  • no monthly fee
  • 1.50% annual percentage yield
  • no minimum deposit is required to open an account
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How to Open a Money Market Account

Opening an MM account is as simple as opening a savings account. You can do it online, but in-person is always an option. Make sure you have your ID handy when it comes time to apply.

Sometimes, you need a minimum balance to open it, depending on the institution. The account usually requires a minimum balance; you maintain that money for a specific period. Most money market funds are not determined; they post higher interest rates than most savings accounts and are more convenient for short-term investors.

Money Market Account Example

Sophie just graduated from university and wants to save for a European trip. She sets her sights on the summer of 2024. Because her time horizon is short, she invests her savings in a money market fund. 

If you remember from above, an MM fund is short-term; funds are invested for a limited time. Treasury and commercial paper funds last an average of one year or less, or 270 days, respectively.

Suppose Sophie wants her money from one of these accounts before the investment time has ended. In that case, many more money market funds offer the option of selling the fund, usually for a smaller profit, and then if the money is in the account until the term ends. 

Final Thoughts

As an organized exchange market, the money market is where participants can lend and borrow short-term, high-quality debt securities that mature in one year or less. 

Furthermore, they enable governments, banks, and other large institutions to sell short-term securities to fund their short-term cash flow needs. Money markets also allow individual investors to invest small amounts in low-risk settings.

Frequently Asked Questions

A money market account has a higher interest rate then a traditional savings account. So if you want to make a little more money on what you're putting away, open a money market fund.

An money market account is a good investment if you're looking to go the safer route. You get a better ROI.

Since a money market account is considered low risk and safe, you most likely won't loose money. Don't forget, however, about fees and interest rates. That can be what depletes your account. 

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