If you want somewhere safe to stow the cash you have set aside for your next vacation or your home renovation you might consider investing in money markets. These accounts do not provide you with much potential for growth, but you will earn interest and won't have to worry about stock market downturns putting the kibosh on your next summer trip. There are two types of money market accounts, and two entities have roles in insuring these investments. The Federal Deposit Insurance Corporation guarantees bank-offered money markets, while the Securities Investor Protection Corporation insures brokerage-held funds.
Money market funds are investment companies that purchase low-risk, low-yield securities such as short-term federal bonds, commercial paper and Treasury bills. The fund managers attempt to keep the price of shares in these funds at precisely $1 per share. Consequently, people often refer to these funds as "cash equivalents" and funds held in the "cash" portion of your 401(k) or retirement account are probably invested in money market funds. In contrast, the money markets available through commercial banks are simply savings accounts on which you can earn interest. Your principal never fluctuates, and you can make withdrawals from these accounts using checks or your debit card.
While the value of your bank money market account cannot drop, you could stand to lose your investment if the institution holding your accounts goes out of business. When this happens, the FDIC steps in and covers your losses for up to $250,000, per account holder. If you have $300,000, in a sole ownership account then you stand to lose up to $50,000 if your bank fails. The FDIC only has jurisdiction over bank accounts because commercial banks pay for FDIC protection with annual insurance premiums. Brokerage firms are ineligible for FDIC coverage which means that you will not get a dime from the FDIC if the brokerage company holding your money market mutual fund becomes insolvent.
The SIPC was formed by a group of investment firms in 1970 as a non-governmental, nonprofit, member-owner entity. SIPC members pay annual premiums into an insurance fund, and money held in this fund covers some of your losses if your broker goes bankrupt. As with the FDIC, the SIPC insures your brokerage account for up to $250,000, per account owner. Money market funds and other types of investment accounts are covered although you may receive replacement shares rather than actual cash if your broker becomes insolvent.
Unlike the FDIC, the SIPC does not provide you with principal protection in the event that your investment holdings lose value. Despite attempts to prevent fluctuations in the value of money market shares, on some occasions these funds have "broken the buck" and the price per share has fallen below $1. You do not receive any compensation from the SIPC when this occurs because the SIPC protects you in the event that your broker goes bankrupt rather than protecting you against market-driven losses of principal.
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- Disadvantages of a Money Market Account
- What Is a Money Market Account?
- How to Protect Your Savings in a Bank Account
- How Safe Are Money Market IRA Accounts?
- The Differences Between Money Market Funds & Money Market Savings Accounts
- Bank Money Markets Vs. Money Market Mutual Funds
- How Does Money Market Work in a Recession?
- What Is an Example of a Low-Risk Asset?