Money market investing is an investment strategy that entails placing funds in a financial money market. Typically, money markets specialize in short-term debt securities, such as liquid government or corporate debt instruments. Money markets are sometimes referred to as "cash markets" because their investment mediums usually have short maturity dates, typically a year or less. Money market rate of returns are usually modest, and money market investing generally presents less risk than other kinds of investments. Banks, credit or cash dealers, and other financial institutions who are seeking to borrow or lend money are the primary investors in money markets.
A short-term government security called a treasury bill is a common debt security used in money market investing. Money market investing may also be done through a repurchase agreement, which allows a dealer to buy and sell government securities on a short-term basis. Another instrument used in money market investing is commercial paper, which is usually an unsecured short-term loan issued by a corporation. Banker’s acceptances are often used in international money market investing. A banker's acceptance is a time draft or negotiable instrument drawn on and accepted by a bank.
Money market investing can be done by opening up money market accounts or money market funds. A money market savings account is a type of deposit account that usually provides investors with higher interest rates than traditional savings accounts. Most money market savings accounts allow investors to take out funds from their accounts, usually on a limited basis, with little or no advance notice. In addition, account holders are frequently able to write a limited number of checks from their accounts each month.
In a money market mutual fund, a number of investors pool their resources together. The fund manager then purchases money market securities on the investors’ behalf. Money market accounts and funds are typically open-ended, allowing investors to add or withdraw money from the account at any time without being penalized. Some money market funds and accounts require investors to maintain a minimum balance.
Finding the best money market account or fund requires investors to weigh their investment goals against the account or fund offerings. Some of the highest money market accounts may offer greater interest rates, but they can also present greater financial risk. In addition, some money market accounts or funds require investors to maintain minimum balances. Other funds or accounts limit the number of withdrawals an investor can make. An investor should also consider any ancillary charges or management fees associated with investing in a particular money market account or fund.
