Money Market

A financial market where short-term lending or borrowing takes place.

What Is the Money Market?

The money market is a term used to refer to all securities that are traded at wholesale or retail, and which have maturities of one year or less. These securities generally include short-term commercial paper, bankers’ acceptances, certificates of deposit, and repurchase agreements.

The money market is an important part of the financial system because it provides liquidity in the event there is a sudden lack of available funds. A lack of liquidity can create a crisis situation where individuals find it difficult to obtain short-term financing. The money market, therefore, plays a crucial role in keeping the economy functioning smoothly.

Types of Money Market Instruments

Money Market Funds

A money market fund is an investment vehicle where individual investors pool their money together, typically through the purchase of shares in the fund. The assets of the fund are invested in high-quality, low-risk securities, such as government bonds and commercial paper. As a result, there are no guarantees regarding the rate of return on your investment.

The returns from money market funds are typically much lower than those from typical stock investments because they carry lower risks. But they are usually much higher — and safer — than bank or certificate of deposit accounts (CDs). In fact, money market funds don’t have FDIC insurance like CDs do; they’re covered by Securities Investor Protection Corporation (SIPC) insurance instead.

Money Market Accounts

Money market accounts are bank accounts that offer some of the conveniences of a checking account (ATM access, check writing) but with some added benefits not usually associated with traditional checking accounts.

A money market account is different from a savings account in two important ways:

There’s usually a minimum deposit required to open the account.
The interest rate earned on the balance in the account is often higher than what’s available for most savings accounts.

A money market account is similar to a checking account. Money market accounts often have restrictions on how frequently you can write checks or withdraw funds from ATMs.

These differences mean that money market accounts are an appealing option for people who want to save money but don’t have enough to meet the minimum balance requirements of traditional interest-bearing accounts, such as certificates of deposit or savings accounts.

Certificates of Deposits (CDs)

A certificate of deposit (CD) is a time deposit, meaning it is an investment that requires you to keep your money in the account for a certain period of time.

CD terms range from as little as three months to as long as 10 years. The longer the term, the higher the interest rate. However, there is typically a trade-off between interest rates and term length. A six-month CD with a lower deposit will usually have a higher interest rate than a three-year CD with a larger deposit, for example.

Some other types of money market instruments include T-bills, commercial paper, repurchase agreements, and money market mutual funds.

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