The money market is the market for short-term borrowing and lending. It incorporates the buying and selling of short-term financial instruments such as Treasury bills and commercial paper. In theory, these are among the least risky investments, since it is extremely rare that such loans are not repaid. The money market also has the advantage that it is usually much easier to find willing buyers and sellers quickly than in other markets. While this still holds true, the credit crisis of 2008 showed that the money market can go through turbulent periods.
Money market investments allow individual investors to put their cash into this market. Doing so usually offers lower risk but lower rewards than investments such as stocks or commodities. The most common investment method is through the money market fund, a type of mutual fund. Such funds are under Securities and Exchange Commission regulations which require fund managers to spread the risk across different financial instruments.
While money market investments are theoretically less risk-prone than many types of investment, the risks can vary. Investors who are particularly concerned about risk may want to consider a money market fund which only invests in government-backed securities. Those who are willing to take more risks should look at funds which invest in a wider range of securities. This greater risk level is usually reflected in higher returns.
The main choice with money market investments is between purchased and sweep funds. A purchased fund usually has a minimum investment level and can only be “cashed in” the day after the investor requests it. A sweep fund will often allow investors to “cash in” the same day.
There are cost and tax implications related to the type of money market investments available. Because of its advantages, a sweep fund usually has higher fees than a purchased fund. Some funds are classed as tax-exempt, though these usually offer a lower yield than those on which tax must be paid. Online calculators can allow investors to see whether the tax savings outweigh the potential lower yield.
Money market investments should not be confused with the United States term “money market account” or “money market deposit account.” These accounts are a form of bank account rather than an investment. People using these accounts are not risking their cash like investors do, except in the general sense of the risk that a bank may go out of business.
A money market deposit account gets its name because the banks can use money deposited in the accounts to speculate on the money markets, though this isn’t mandatory. Banks that do so will often offer higher rates of interest, but as these rates are guaranteed, it’s the bank which bears the risk if the speculations doen’t pay off. The main purpose of such accounts is to get around rules which say US banks cannot pay interest to savers with checking accounts. The money market deposit account is technically classed as a savings account, but does allow the saver some flexibility for writing checks upon it.