How Money Markets Work

Money market funds are considered a low-risk investment.

Money market funds are considered a low-risk investment.

If you’re starting to think about investing some of that money you’ve been saving up, you don’t necessarily have to dive headfirst into the stock market. You’ve probably already discovered there are enough investment options to make your head spin, and one you keep hearing about is money market funds. Just one problem – you need a breakdown of how money markets work, to determine if they are the right option for you.

The Basics

A money market is basically a safer form of mutual fund, which begs the question: What’s a mutual fund? When you and several other people give an investment firm money, which is then pooled together and invested in stocks, bonds and other investment securities, it is known as a mutual fund. If you direct the money to be invested in a money market fund, the investment firm is legally required to put the money into low-risk options such as government securities and certificates of deposit, the idea being that you are far less likely to lose your principal investment.


The most important thing on your mind is how you’ll make money with a money market fund. Your money is invested into low-risk securities, which, according to the U.S. Securities and Exchange Commission, try to keep their net asset value (NAV) at $1.00 per share, with the yield increasing or decreasing. You don’t have to worry about your money being locked up in a money market for a long period of time, because unlike other low-risk investments, you can get your money out at any time. You are usually paid your dividends within seven business days.


The most talked-about advantage of a money market fund is that it is generally a low-risk investment, which is ideal for first-time investors who are hesitant to take big risks with their hard-earned cash. Money markets are also great for storing cash, similar to a savings account, only with a somewhat higher return. They can be a great option if you are looking to get a little extra money together for a new car, or to get those credit cards paid off.


Money markets are definitely not ideal if you’re looking for ways to make a lot of money in a hurry. As with any low-risk investment alternative, returns are not as high as riskier alternatives. Money markets are not federally insured, and while they are touted as a safer, low-risk investment option, money market funds are still an investment, which means there is a chance you could lose your money.


About the Author

Based in South Florida, Leann Harms has been writing since 2008. Her design, technology, business and entertainment articles have appeared in "Design Trade" magazine and Web sites including eHow. Harms has a Bachelor of Arts in English from Florida Atlantic University.

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