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Money market

Money market is a financial term it pays to understand. Bankrate explains what it is.

What is the money market?

The money market is an ideal investment for individuals who want safety and liquidity. Most money market investments offer maturities ranging from one day to one year.

Deeper definition

The money market describes a group of financial instruments available to borrowers and investors. Types of money market instruments include:

  • Treasury bills: Short-term, U.S. government-issued notes that mature within 90, 180 or 360 days.
  • Federal agency notes: A select number of federal agencies issue short- and long-term obligations that aren’t backed by the government, but still have a relatively low risk of default.
  • Certificates of deposit: Also known as CDs, these certificates are issued by a federally backed bank against deposited funds that earn a specific return over a specific period of time.

Money market deposit accounts function similarly to traditional savings and checking accounts. Individuals access the funds with checks, withdrawals, and debit cards up to six times per month. The money is insured by the Federal Deposit Insurance Corp., which minimizes risk.

Money market mutual funds function as investments with small, but not guaranteed, returns. They maintain a net asset value of $1 per share, and they include instruments such as U.S. Treasury securities. Because money market funds aren’t FDIC-insured, they aren’t recommended for risk-averse individuals or anyone who wants an investment for long-term goals.

Example of money market account

Because money market accounts earn more interest than checking or savings accounts, they are ideal for anyone who carries high balances in their more traditional accounts. In general, money markets are best for people who carry at least $5,000 in their account and want to take advantage of the earning potential. Benefits of having a money market account include:

  • Safe investment: Low risk makes a money market account a good spot to park money while waiting to buy bonds at peak interest rates, invest in other types of funds, or increase the investment at a steady rate.
  • Instant access to cash: Although the number of allowed withdrawals may be limited every month, many money market accounts offer debit cards and check-writing capabilities for easy, fast access to money.
  • Stable net asset values: Professional investment managers manage these accounts, and they actively work to keep the price at which individuals buy and sell money market funds at a stable amount of $1.

Even though money markets are widely considered stable, they aren’t foolproof. For example, during the 2008 credit crisis, some money market mutual funds had net asset values that fell below $1. Anyone who withdrew money during that time lost a percentage of his investments. Other potential downsides include:

  • Bank money market accounts limit withdrawals (usually no more than six per month).
  • Not all money market accounts are FDIC-insured; always double-check.
  • Money market investments pay lower interest than U.S. Treasury bonds.
  • Fees may be higher in some situations than the amount of earned interest.

Getting a high interest rate isn’t a given. Individuals considering opening a money market account should shop around to find the bank or lending institution with the best interest rates and lowest fees.

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