Money Markets
Short term debt obligations are purchased and sold by various institutions trying to manage their financial needs within money markets. Numerous kinds of securities are exchanged on money markets, and they all mature within a year and are generally liquid. Investors can invest in money market mutual funds or buy and sell money market securities themselves, and while the rate of return is lower than that of the stock market, there is little risk with these investments.
High Interest Money Markets
High interest money markets provide better interest rates and higher earnings than conventional savings accounts. There are two kinds of such markets: money market deposit accounts and money market mutual funds. The former is essentially an amalgam between a checking and savings account. Here, an investor deposits money at a financial institution, which in turn is liable for the amount of the deposit and interest. Account owners usually can only withdraw money market funds three to six times a month, and they can only write a limited number of checks. These money market deposit accounts differ between financial institutions, as they will have different market rates, different minimum balances, and different maximum number of withdrawals.
Money market mutual funds are quite different than money market deposit accounts, as here investment companies purchase safe, short-term securities – commercial paper, certificates of deposit, and treasury bills – with the funds. The FDIC does not insure these funds, unlike money market deposit accounts.
Treasury Money Market
To raise money, the Treasury sells T-Bills, and people pay only some of the face value. T-Bills mature in three months, and consumers can negotiate their purchase prices by way of a bidding process. Treasury money markets refer to money market mutual securities issued by the U.S. Treasury or money market mutual funds that are based exclusively on such Treasury securities. In both cases, investors ranging from individuals to large groups can access this market, as Treasury securities are highly reliable.
The Treasury money market mutual funds use funds to purchase Treasury money market securities. Because the Treasury will always make good on its debts, this mutual fund is very reliable though with a rather low rate of return. In fact, return rates can be as low as .01% during economic contractions and recessions, which is virtually negligible.
Money Market Savings Accounts
A money market savings account invests in short-term, fixed-income financial products that mature in less than a year. Money market savings accounts have higher interest rates than traditional accounts, and investors must maintain a relatively high minimum balance and can only make six withdrawals or transfers a month. In fact, only three withdrawals or transfers can be made by check though the investor can make an unlimited number of deposits. A person breaching these conditions will have fees automatically taken against his account. Because of the conditions on withdrawals, these funds are not intended to substitute for standard checking accounts but instead be used for emergencies or future projects.
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