In most houses, there's a flat surface -- maybe two or three -- where things tend to pile up. It's where you put stuff when you're going from A to B, or if you're carrying too much and might otherwise drop something and break it. Money market funds play the same role in your investment portfolio. That's where you put your money while you consider investment options, or when the markets are giving you fits. When you move money in or out of your money market fund, your transaction will show both a trade date and a settlement date.
Trade vs. Settlement Dates
Although you can often use them in the same ways, bank accounts and money market funds work differently "under the hood." If you take money from your bank account, the transaction is completed immediately. However, a money market fund isn't exactly the same as cash. Each share is actually part-ownership in a raft of different investments, worth about $1. That means there's a lot of behind-the-scenes paperwork involved in processing the transaction. The trade date is when you actually placed the buy or sell order. The settlement date is three business days later, when the formalities have concluded and your funds are available.
Why It Matters
The settlement date is when you get the money in your account, which only matters to you. The trade date is the one the government and the markets care about. At year's end the trade date determines which tax year a transaction is recorded under. If you're waiting out the 31-day period to avoid the "wash sale" rules, you're counting from the trading date. The three-day wait is also important if you're alternately buying and selling. If you try to resell shares before their settlement date, that's "freeriding," which is illegal. If it happens, your cash account will be suspended for 90 days.
How the Fund Works
A money market fund could be described as a mutual fund in a checking account's clothing. It operates like any other mutual fund, gathering in contributions from thousands of small investors and turning them into one large, centrally controlled investment portfolio. Most mutual funds invest for the long term, but money market funds invest in highly secure, short-term products such as government securities, guaranteed-interest investments and quality corporate bonds. They treat the investment much like a high-interest bank account, letting you move funds in and out or even write checks on the account.
How They're Used
Money market funds have several uses, but basically they serve as a storage bin for cash. If you were saving for the down payment on a house, for example, a money market account pays a little better than most savings accounts. It's also an excellent place to keep a store of emergency money, ideally six to 12 months of normal household expenses. Such accounts are also used as a place to stash cash when the markets are in an uproar or when you're moving money between investments and haven't made a purchase decision.
- Comstock Images/Comstock/Getty Images
- What Is a Book Closing Date Dividend?
- Can I Sell a Stock the Same Day I Purchase It?
- Pros & Cons of Financial Money Markets
- How do I Close a Money Market Account?
- What Is a Trade Settlement?
- About Solar Hot Water Systems
- What Happens if I Deposit More Than Ten Grand?
- How Do Bank Money Market Accounts Work?