Money market investing is depositing money with a bank or financial institution that keeps its cash in financial obligations that span a short term. This is done to provide low risk money market investing that yields modest returns.
Money market investing is not for the individual who wants to get rich quick. The short-term debt strategies held in money market investing are usually made in highly rated companies and government agencies.
Introduction to Money Market Investing
There are a number of positives and negatives investors should be aware of when it comes to the money market. In this article, we’ll take a look at these ups and downs and show you how the downs can greatly outweigh the ups.
- Money market investing yields an average of 2% to %5 per year. You can, theoretically, lose money in a money market investment, but it is highly unlikely. The FDIC does not insure money market investments. You can lose all of your investment if the company holding it goes bankrupt.
- Money market investing is beneficial because of its low risk. Many investors hold their money in a money market account when they are not investing in a more aggressive strategy. This gives the money a place to rest where it can still earn moderately, at low risk. Because of this procedure, money market investing represents one of the most widely held securities in finance.
- Investors often deposit profits from bonds, stocks, and mutual funds into money market accounts. Dividend and interest proceeds from more aggressive investments are generally deposited directly into money market accounts.
- Initially, you must deposit higher sums of money into money market investments than into bank accounts. Money market investing generally requires deposits of at least $100 to $5000 at the onset. The per share price of money market investments is usually one dollar. Proceeds from money market investing are paid in shares. Check writing services are provided as a part of most money market investing.
- Money market investing is not one-size-fits all. Money market investing firms put their money in dissimilar securities. Because of this, they pay different interest rates. You can deposit your money into a money market savings account that will yield a low interest rate, but is somewhat higher in interest than a standard bank account, or you can do your money market investing in a mutual fund.
- A mutual fund pools the resources of many money market investors. The mutual fund’s manager buys money market securities for the mutual fund.
- Money market investing is generally open-ended, which means that the investors can deposit or withdraw monies at any time without risking penalties. Most money market accounts and funds require that a minimum balance be maintained.
- Interest rates from money market accounts are usually based on risk. The money market accounts and mutual funds paying the highest interest are, thereby, likely to run the highest financial risk. This is where the money market investor needs to weigh the security of their monies against the promise of return.
- Different money market accounts make varying demands on the investor. Some will maintain a higher minimum balance, while others will limit the number of allowable withdrawals, some might do both.
Money market investing can be a very advantageous thing to do, especially if you need a short-term, relatively safe place to park cash.
However, before investing any money in a money market mutual fund, investors should first understand both the pros and the cons.
Like any investment, those pros and cons make a money market fund ideal in some situations and potentially harmful in others. If you’re in your 30s and holding your retirement savings in a money market fund, you’re probably doing it wrong.