What Is A Money Market Account

Money markets describe the process by which financial institutions borrow or invest capital for short periods of time. Securities exchanged in the money markets appear in the chart below. Banks are major players in the money market, and they routinely borrow money to make more loans or deposit money in exchange for interest in other financial institutions. The world's central banks, and especially the U.S. Federal Reserve Banks, influence the interest rates charged in the money markets through adjustments in the federal funds rate. Consequently, interest rates offered in the money markets will reflect Federal Reserve adjustments.

For the average investor, money market accounts, sometimes called money market deposit accounts, are funds invested through a financial institution that earn interest linked to various short-term money market securities such as Treasury Bills (see the chart below).

A money market account is one of the safest financial investments available, although the U.S. federal government does not guarantee the return of the invested funds unless the account is FDIC-insured. Large corporations, financial institutions and governments use these accounts to obtain the capital necessary to operate for a short period of time. Investors use money market accounts to temporarily store funds in a bank, mutual fund, credit union or brokerage. Many authors define money market account to refer to accounts at banks and, specifically, bank accounts that are insured by the U.S. federal government. However, this distinction has caused some confusion because bank affiliates can now sell money market mutual funds, which are not insured.

Given that no investor ever lost principal in a money market investment, the need for FDIC insurance may be questionable. The greatest difference between money market accounts with banks and accounts with mutual funds are the fees, management expenses and other "fine print" terms that are unique to each and every account. As such, investment research should be focused on choosing taxable vs. non-taxable money market accounts, identifying the highest money market rates available, and finding accounts that will charge the absolute minimum in fees and expenses. All financial disclosures and/or prospectuses should be read carefully.

Money Market Securities:

What are the Advantages of a Money Market Account?

1. Compared to a CD, money market accounts are completely liquid and investors can access their money at any time.  Money market accounts do not have a substantial penalty for early withdrawal.  However, CD rates are normally a little higher because institutions will pay a little more interest for the guaranteed deposit.
2. Compared to a bond, money market accounts offer more frequent compounding of interest (normally daily or monthly), may offer a shorter investment timeline, and may have less transactions cost to exchange securities.
3. Compared to passbook savings accounts, money market accounts may offer a better rate of return from the same institution.  Some institutions require large deposits to open money market accounts, however, many banks and credit unions will warmly accept any deposit.  The FDIC will insure money market accounts at banks just like savings accounts.
   

Disclaimer- The information on this site is believed to be accurate, but no warranty is made regarding rates, terms or features of any financial product. Carefully read the prospectus for any product before investing.  The best money market rates, accounts, and funds are determined by individual needs, and tax, financial and legal advisors should be consulted before making an investment.

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