People in the investment world casually use the word "cash" to describe money held in a number of different places. These include your piggy bank, savings accounts at banks, cash accounts at brokerage firms and money market funds. However, while money market funds and cash accounts are sometimes interlinked, these are actually two entirely different investment vessels.
A brokerage cash account contains money that you have yet to invest. When you buy an investment, you initially deposit the money into this holding account and your broker uses this money to buy the securities in question. Dividends and interest payments on your holdings are deposited into the cash account. Brokerage cash accounts are subject to federal regulations. Under regulation T, your broker cannot buy securities on your behalf unless you already have deposited cash into the account. In this way, these accounts differ from brokerage margin accounts through which a broker can loan you money to buy securities.
Money Market Fund
Money market funds are investment companies that purchase short-term securities. These companies are regulated at the federal level by the Securities and Exchange Commission and other federal agencies. A typical fund contains a certain amount of cash, U.S. federal treasury bills, certificates of deposit and some short-term commercial or municipal bonds. Federal laws require funds to invest in securities with an average maturity of 60 days or less. You earn interest on the underlying bonds and you can sell your shares at any time. Unlike bank issued money market accounts, these mutual funds are not federally insured. Officially, money market funds are cash equivalents rather than cash accounts. In theory, shares in the funds always remain steady at a price of $1 per share.
You don't earn any money when you hold funds in a brokerage cash account. Consequently, brokers often add a sweep feature to these accounts which means your funds are transferred to another investment on a nightly basis. The sweep account may take the form of a federally insured interest paying bank account. Alternatively, your broker may sweep your cash into a money market mutual fund. Either way, the funds as well as your earnings are redeposited into your cash account at the start of the next business day. Your broker must provide you with account disclosures explaining the various sweep options.
During the financial crisis of 2008, some money market funds "broke the buck," which means the price per share dropped below the $1 mark. Simply put, some investors lost money in these cash equivalent accounts. The Securities and Exchange Commission passed measures in 2010 that are designed to reduce the chances of this happening again. The new rules include a weekly investment target requiring fund manager's to ensure that at least 30 percent of the fund's assets take the form of cash, federal debts or short-term government securities. However, there are no certain things in the investment world and mutual fund shares could still in theory break the buck. If principal risks concern you then keep your money in a cash account rather than a money market fund.
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