What is Money Market?

Money market refers to a financial market where investors can trade or borrow securities short-term. The securities involved in the money market are typically traded at wholesale or retail, and their maturities last up to a year. Some of the securities traded at money markets are short-term commercial papers, certificates of deposit, and repurchase agreements.

In case there is a sudden lack of available funds, a money market can be utilized to create liquidity. A lack of liquidity can pose the risk of entities being unable to receive short-term financing. Thus, the money market is a key factor in maintaining a stable, functioning economy and preventing crisis situations.

Some of the most common money market instruments are money market funds and accounts, and certificates of deposit.

Money Market Funds

A money market fund is an investment instrument for individual investors to pool assets together by purchasing the shares in the fund. The fund assets are used for investments into high-quality, low-risk securities. These include government bonds and commercial paper.

The investors have no guarantee for the rate of the return on investment (ROI). The returns tend to be far lower than from more typical stock investments due to the lower risks attached. However, the returns from the money market funds are significantly higher than those from bank or certificate of deposit (CD) accounts.

Money market funds are covered by Securities Investor Protection Corporation (SIPC) insurance, while CDs have Federal Deposit Insurance Corporation (FDIC) insurance.

Money Market Accounts

Money market accounts are bank accounts that offer additional benefits alongside the traditional functions of a checking account, like ATM access or check writing.

There are two criteria setting money market accounts apart from savings accounts:

• Customers must put down a minimum deposit to open the accounts;
• The interest rate on the balance tends to be higher than for savings accounts

Money market accounts share similarities with checking accounts. The frequency of writing checks or withdrawing money from an ATM may be restricted.

The differences between money market accounts and checking accounts can make the former option more appealing for customers who are looking into saving money but cannot meet the minimum balance requirements that apply to traditional interest-bearing accounts, like savings accounts or certificates of deposit (CD).

Certificates of Deposits (CDs)

Certificates of deposit (CDs) are considered to be time deposits. Entities holding a CD must keep their money in the account for a predetermined period of time.

The typical duration of a certificate of deposit can last anywhere between 3 months to 10 years. The interest rate is higher the longer the duration is.

However, there is generally a balance between the duration of the term and its interest rates. If a year-long certificate has a lower deposit, its interest rate may be higher than that of a five-year certificate with a larger deposit.