The money market is the market for financial assets with original maturities of one year or less. Such financial assets include U. S. Treasury bills, certificates of deposit and commercial paper. Large borrowers that seek short-term funding and institutional investors willing to supply excess cash to those seeking funds are the market's primary participants. Borrowers include governments, corporations and banks. Lenders include pension funds, corporations, insurance companies and governments. Individuals participate in the market as investors through money market mutual funds and money market accounts.
Money Market Account
Banks and credit unions issue money market accounts, which are similar to a passbook savings account. Money market accounts issued by banks are insured by the Federal Deposit Insurance Corporation, and those issued by credit unions are insured by the National Credit Union Administration. The interest rate you receive on the account is slightly higher than the rate you receive on a savings account. However, along with the higher interest rate comes some account restrictions. For example, the money market account will have a minimum balance requirement and you will be limited to a maximum number of withdrawals and checks per month without incurring a penalty. The financial institution will pay you interest on your deposit, which is a percentage of the interest it will receive by loaning customers' deposits to other institutions and individuals. In most instances, the interest you are paid will be compounded daily and paid monthly.
Money Market Fund
A money market fund is a mutual fund that invests only in money market instruments created to meet short-term cash requirements of the market's participants. Redeemable shares are issued to investors by the fund. The U. S. government regulates the funds according to the Securities and Exchange Commission’s Investment Company Act of 1940, which stipulates the quality, maturity and diversity of investments in a fund's portfolio. Fund managers strive to maintain a $1 per share value. Unlike money market accounts that pay interest to investors, money market funds pay dividends. Investor earnings reflect the relatively low risk of the financial assets in which it invests.
Money Market Account Vs. Money Market Fund
Unlike money market accounts, deposits in money market funds are not guaranteed. Due to the greater risk of a money market fund, however, the return you will earn by investing in it will be more than is paid on a money market account -- but slightly less than the return on a certificate of deposit.
The key attribute of money market accounts and money market funds is the relative safety of the investments. Both provide reasonable returns with short maturities. In addition, the securities are issued by banks, governments and large corporations. As a result, there is little risk of default. In addition, both investment options have relatively low minimum investment requirements, which also minimizes your investment risk.
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