What does the money market buy and sell?
The money market involves the purchase and sale of large volumes of very short-term debt products, such as overnight reserves or commercial paper. An individual may invest in the money market by purchasing a money market mutual fund, buying a Treasury bill, or opening a money market account at a bank.
Money market funds are a type of mutual fund that invests in low-risk, short-term debt securities, such as Treasury bills, municipal debt, or corporate bonds. They're designed to offer a safe, stable investment option for money you may need to access in the short term, like an emergency fund or a short-term goal.
Money markets include markets for such instruments as bank accounts, including term certificates of deposit; interbank loans (loans between banks); money market mutual funds; commercial paper; Treasury bills; and securities lending and repurchase agreements (repos).
Some of the instruments traded in the money market include Treasury bills, certificates of deposit, commercial paper, federal funds, bills of exchange, and short-term mortgage-backed securities and asset-backed securities.
A money market fund is a type of mutual fund that invests in high-quality, short-term debt instruments, cash, and cash equivalents. Though not quite as safe as cash, money market funds are considered extremely low-risk on the investment spectrum.
Key Takeaways. The money market involves the purchase and sale of large volumes of very short-term debt products, such as overnight reserves or commercial paper. An individual may invest in the money market by purchasing a money market mutual fund, buying a Treasury bill, or opening a money market account at a bank.
The money market deals in short-term loans, generally for a period of a year or less. As short-term securities became a commodity, the money market became a component of the financial market for assets involved in short-term borrowing, lending, buying and selling with original maturities of one year or less.
All investments are subject to market risk, including possible loss of principal. Retail Money Market Funds: You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so.
How Do Money Market Accounts Work? Money market accounts work like other deposit accounts, such as savings accounts. As customers deposit funds in a money market account, they earn interest on those funds. Typically, interest on money market accounts is compounded daily and paid monthly.
The 7-Day Yield is the average income paid out over the previous seven days assuming interest income is not reinvested and it reflects the effect of all applicable waivers.
What are the risks of the money market?
Because they invest in fixed income securities, money market funds and ultra-short duration funds are subject to three main risks: interest rate risk, liquidity risk and credit risk.
The money market operates through the interaction of various participants, including governments, corporations, financial institutions, and individual investors. These participants engage in short-term borrowing and lending to meet their immediate cash needs and manage liquidity.
Money Market Funds
Ultra-conservative investors and unsophisticated investors often stash their cash in money market funds. While these funds provide a high degree of safety, they should only be used for short-term investment. There's no need to avoid equity funds when the economy is slowing.
A money market fund (MMF) is a type of mutual fund that invests in cash, cash equivalents and short-term debt securities. Think of MMFs as a cash management investment solution intended to offer portfolio diversification, liquidity and operational ease.
While money market funds aren't ideal for long-term investing due to their low returns and lack of capital appreciation, they offer a stable, secure investment option for individuals looking to invest for the short term.
A change in those “other determinants” will shift the demand for money. Among the most important variables that can shift the demand for money are the level of income and real GDP, the price level, expectations, transfer costs, and preferences.
| Account | National average money market account | Sallie Mae Money Market |
|---|---|---|
| Deposit amount | $10,000 | $10,000 |
| APY | 0.68% APY | 4.65% APY |
| Earnings after six months | $33.94 | $229.86 |
| Earnings after 1 year | $68 | $465 |
Banks often require a minimum deposit to open the account, then a minimum balance to keep in the account. It's usually much higher than regular savings accounts. This often means $5,000, but can be up to $10,000 at some banks. As stated above, you need to pay a fee if your balance dips below the minimum requirement.
Money market accounts pay a variable interest rate, so the rate consumers earn on their money can fluctuate over time. It's common for these accounts to have tiered rates, meaning higher balances are rewarded with a higher annual percentage yield (APY).
Interbank loans (loans between banks), money market mutual funds, commercial paper, Treasury bills and securities lending and repurchase agreements, are all examples of money markets instruments.
What are money markets paying now?
- Ally Bank®: Earn up to 4.20% APY.
- CFG Bank: Earn up to 5.25% APY.
- EverBank® (formerly TIAA Bank®): Earn up to 4.30% APY.
- First Internet Bank of Indiana: Earn up to 5.48% APY.
- Prime Alliance Bank: Earn up to 4.50% APY.
- Quontic Bank: Earn up to 5.00% APY.
- Redneck Bank®: Earn up to 4.90% APY.
However, this only happens very rarely, but because money market funds are not FDIC-insured, meaning that money market funds can lose money.
Six to 12 months of living expenses are typically recommended for the amount of money that should be kept in cash in these types of accounts for unforeseen emergencies and life events. Beyond that, the money is essentially sitting and losing its value.
The Bottom Line. Both money market accounts and money market funds are relatively safe, low-risk investments, but MMAs are insured up to $250,000 per depositor by the FDIC and money market funds aren't.
Like other deposit accounts, money market accounts are insured by the FDIC or NCUA, up to $250,000 held by the same owner or owners. Money market accounts tend to pay you higher interest rates than other types of savings accounts.
