Money Market Account

Money market accounts are used for short-term borrowing and lending on money. This type of account, offered by banks and credit unions, is just like a regular savings account; however, there are some slight differences. The rates, amount of withdrawals, and types of accounts allowed under the Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Administration (NCUA) are varied and will be explained further.


1. What is a Money Market Account?

A money market account is much like a savings account that is offered by both banks and credit unions, but it has a few differences from a savings account. This type of account pays a higher interest rate than most savings accounts and may also require a higher minimum balance, anywhere from $1,000 - $2,500; it also only allows 3 to 6 withdrawals per month. For those who do not have the $1,000 to invest, there are certain banks that only require $1.00 for a money market. The time period of a money market account is normally 13 months. There is also one other difference that many money markets allow, that is the availability to write a check, though the amount of checks are usually only 3 per month. Money markets are found on the global financial market, providing liquid funding for the global financial system on a short-term basis. Unlike the capital market that provides long-term funding that is supplied by equity and bonds, money market trades are short-term financial instruments often called "paper." Consisting of financial institutions such as banks and credit unions, there are also other companies that offer money markets: financial companies, large corporations with strong credit ratings, in the United States there are trading companies, Retail and Institutional Money Market Funds, Cash management programs, and Arbitrage ABCP conduits. In London, New York, and Tokyo, there are places that will trade between banks called "money centers." Money market accounts should not be confused with money market mutual funds, and these money market accounts will have a higher yield on moneys deposited than a passbook savings account. Money market accounts can also refer to a bank money market deposit account (MMDA), a brokerage sweep for free credit balance, or a money market mutual fund.

2. The History of Money Markets

In the early 1970s, the money market mutual fund was introduced into the American financial markets. A year later the first money market fund was established by Bruce R. Bent, the President of the Reserve Fund, Inc. The Reserve Fund sold shares to investors in 1972; even though there were only assets of $300,000, it rose to $390 million by 1975, and in early 1981, the money market had grown to $80 billion. The reason for the rapid growth was due to the availability for small investors. Often, the reason for this was because most small businesses were seasonal, and if they made an excess of $100,000, they would have to invest in T-bills or a checking account, causing the business to incur a cost of 7% on their opportunities. T-bills cost a $10,000 investment and CDs cost $100,000; however, if a business only had $95,000, it would cost the business $7,000. The money market accounts created an opening for business owners to invest a smaller amount of money with higher yields in return. Thus, the money market accounts grew into the secure successful accounts they are today. Since small business investors could pool their money together to invest more into the money markets, this allowed higher yield, diversification, check-writing privileges, and a full-time, professional portfolio management. However, the United States was not the first money market that was set up; in 1968, John Oswin Schroy set up the fund called Conta Garantia, which was set up for small investors and it allowed low denomination investments.

3. What exactly is a Money Market?

A money market is basically a savings account that will draw interest because you are limited to a certain amount of withdrawals, and it will pay you interest that is compounded daily and paid on a monthly basis. In basic terms, this money is earned on a daily basis and then put into your account once a month. You can deposit as much as you would like during the time you have your money market account open; the only thing limited is your amount of withdrawals. What happens to your money while in the money market is also something you should know about; the financial institution will lend it to other customers, and that loan is repaid at a higher interest rate, thus you are paid though your money market. A money market is that of repurchasing agreements, commercial paper, and similar instruments of funding; the other instruments are very often benchmarked to LIBOR. LIBOR is the London Interbank Offered Rate; this is the interest rate that is offered by banks to lend unsecured funds to other banks and is the daily reference rate based on these interest rates. These unsecured funds are offered to other banks that are a wholesale money marker, also known as interbank markets throughout London. This rate is slightly higher than the London Interbank Bid Rate (LIBID).

4. Who Funds a Money Market?

There is a wide and varied amount of people who fund money markets; the best place to start your search for these accounts is, of course, your bank or credit union, whichever your financial institution may be. In the United States, as mentioned before, local, state, and federal governments issue the paper needed to meet the needs of funding. The local and state government will issue municipal paper; this is a bond, which is often exempt from the federal and state income tax of where they are issued, but there are some municipal bonds that are issued that are not fully tax-exempt. When you have a federal government mutual fund, this comes from the US Treasury, and you will receive a Treasury bill. This is also called a T-bill, this bill will mature in one year or less. The incentive of keeping these money markets for the full maturity rate is that if they do not reach maturity, they will be discounted at the par value. This is encouraging to allow the bill to yield to maturity. Many in the financial world feel that this is the best risk-free investment for those wishing to invest in the United States. When you invest in a money market, you are helping pay a public debt and funding many things such as trading companies that pay for overseas suppliers, banks, cash management programs, Arbitrage ABCP conduits, Retail and Institution Money Market funds, Central Banks, or even the US public debt. In the end, the investor is paid a higher rate for allowing their money market to mature. The system of the money market was set up for the investor to be able to make a small investment and get a nice return when they are patient.

5. Instruments Used for Money Markets

You may not be aware of the wide variety of money market instruments used. Perhaps you have even used some yourself without realizing that you were in a money market. There is a Certificate of Deposit, Commercial paper, Banker's acceptance, Repurchase agreements, Eurodollar deposits, Federal Agency Short-Term Securities (these will be discussed further), Federal funds, Municipal notes, Treasury bills, and Money market mutual funds. A Federal Agency Short-Term Security is issued by government sponsored enterprises, including the Federal Home Loan Banks, the Federal National Mortgage Association, and the Farm Credit System.

6. Is a Money Market Safe?

In today's world, you are already aware that your financial transactions matter to your money growing. Often you may wonder if the investment you are making is safe, can you trust the institution, or how secure is the financial investment you made. Money markets are one of the safest places to put your money because they are backed and insured by the Federal Deposit Insurance Corporation, commonly known as the FDIC. What does this mean for your investment? Simply, that even if the bank or credit union goes out of business, your money will still be there. The FDIC was created in 1933 as an independent agency of the federal government because of the failures of banks in the 1920s and 1930s. Since then, if a bank or credit union is insured by the FDIC, no one has lost any money they have invested. If you are with a credit union, your money market is insured by the National Credit Union Administration (NCUA), another federal agency. Rest assured that your money is safe, even if for some odd reason your financial institution closes.

7. Where to Find a Money Market Account?

There are many places where you can find a money market account, from your own financial institution to the Internet. You can even open an account and make deposits online in the convenience of your own home. Money markets are in a great number of financial institutions and finance companies. You just have to look around, do your research on the best rates and what is going to suit your lifestyle and investment amount. The best place to begin is your own bank or credit union. They will have people who can help guide you to what will work best in your situation. If you want to do your research before you go to your bank ,or you are just beginning to look for information on money markets, make sure you put in your keywords of money market accounts, money markets, and money market rates. This will give you a start on your journey into the money market world. Libraries, newspapers, and bookstores will also have information for you on the current money market rates, money market accounts, and some of the history of the companies you are looking at.

8. What are the Money Market Rates?

Money market rates can vary from low to high. This depends not only on your investment location, but also the rate that your current financial institution has in place. Each financial institution has a different rate. This is why you must look around for the best rate. One bank may have a higher rate than the credit union you belong to, but the credit union may only require a $25.00 deposit rather than $1,000 for the bank. Rates vary from financial institution to financial institution and day to day. It is a liquid market with a variable rate, so it is wise for the investor to do their homework. Make sure you are getting the best deal for your money when you place it in a money market, then allow it to grow during the time your money is allowed to mature. What you choose to do with the money afterward is of course up to you. At any rate, after you have opened your money market account, no matter the rate, you will be able to see your money grow daily as the interest becomes compounded. Make sure you check on how your interest rate may change with whomever you have decided to invest with, and have fun as you watch your money grow.

9. Is a Money Market for You?

Only you can answer that. If you would like to start learning about the market and how it works, yes, a money market may be right up your alley. Only you can decide this after talking with your financial institution and looking at your finances. This is a wonderful way to make more money with the money you have without taking the big risk of the stock market or other forms of investment. You must have the patience to allow your money market to mature, and you also need to make sure that you are not going to go over your withdrawal limit for the month to avoid any penalties you may incur and keep the required balance. It is a safe market to invest in for beginners and fun to learn for those with an interest in finances.
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