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What is the Money Market? Why is Your Money There?

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money marketInvestments come in many different forms. At one end are stocks, which are considered fairly high-risk, but can give you high returns. On the other end are low-risk investments, including the money market. If you seek safety, security, and low-risk investments, money markets might be the right choice for you.

What is the Money Market?

The money market trades short-term debt investments and lets you access funds at any time. Money markets include debt investments such as:

  • U.S. Treasury bills: These are government-issued notes that mature anywhere from a few days to a year.
  • Federal agency notes: Basically, short- and long-term notes that don’t have the backing of the federal government.
  • CDs: Certificates of deposit earn a specific amount of money set over a certain amount of time.  
Money Market Account vs. Money Market Mutual Fund

You can invest in money markets two different ways: With a money market account or money market mutual fund.

While both give you the opportunity to get into money markets, they aren’t the same thing. A money market account is like a high-yield savings account. It earns similar (but sometimes higher) interest. The interest is based on the interest rates in money markets. You always have access to your money, even getting checks and debit cards to make withdrawals. 

A money market mutual fund, or just money market fund, invests in very liquid securities, or cash equivalents. The average maturity of a money market fund is 60 days or less. While most money market accounts are FDIC insured, money market funds aren’t. Money market funds could lose money if the market takes a hit.

Why Is Your Money in the Money Market?

money marketIf you’re a conservative investor, you probably don’t want to risk losing too much money. The return on investment in the money market is low, but so is the risk. However, even with a low reward, you still stand to reap some benefits.

Better than savings accounts

You get to put your money into money markets without worrying too much about loss. While all investments carry risk, money markets are among the least-risky investments you can have. They act like a savings and checking account, where you can access your money when you want it (although they limit withdrawals to about six per month). Interest is compounded daily, earning you more in less time than a traditional savings account.

Instant access to cash

Sometimes investing in the stock market is a waiting game. If you sell your shares whenever you want, you could pull out before you’ve maximized earning potential. That could put you at a loss. It’s not the same as a money market account. If you need a place to put an emergency fund of a safety net for other expenses, money markets can get to your money without having to wait to cash out.

Low-risk investment for the conservative investor.

If you’re wary of putting your money into the stock market or you’re looking for another avenue to diversify your income, money markets might be a good choice. They’re generally fairly low-risk for conservative investors and those retiring in the near future.

Money Market Alternatives

If money markets aren’t right for you, consider putting your money in other safe, accessible places.

  • High-yield savings account: There’s no risk in putting your money in a high-yield savings account. However, interest rates tend to be lower than what you’d earn if you were investing your money, even in a money market account. You could also put your money into a traditional savings account, but earnings are usually around 0.01%.
  • CDs: You can park your money in your own CD without the money market tie. You could earn more interest in a CD than some money markets, but it depends on how much you put into it. The higher the dollar amount, the more earnings you set to cash in. Remember that you can’t touch money in CDs for a certain period of time, usually a set amount of months or years. If you need to access your cash whenever you want, you may want to skip CDs.
The Bottom Line

money marketEven though the money market is relatively low risk, there’s still a chance of losing money if you put your investments in there. But keep in mind that your losses aren’t nearly as high as some other, riskier, investments, like stocks.

Money market accounts — not mutual funds — are often low-risk investments. As a result, they typically let your earn money while using it whenever you want. It’s a good idea for those who don’t care for riskier investments or are planning to retire soon.

Investing Tips
  • If you’re struggling to find the right avenue to put your money on, it could be time to talk to a financial professional. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
  • Keep up the diversification. Even low-risk investors shouldn’t put all their money in one place. If you’re already in money markets, look into other areas where you can put some money. For conservative investors, you still have more options than you think.

Photo credit: iStock.com/courtneyk, iStock.com/AzmanL, iStock.com/ferrantraite

The post What is the Money Market? Why is Your Money There? appeared first on SmartAsset Blog.

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