20 Investments: The Money Market
  1. 20 Investments: Introduction
  2. 20 Investments: American Depository Receipt (ADR)
  3. 20 Investments: Annuity
  4. 20 Investments: Closed-End Investment Fund
  5. 20 Investments: Collectibles
  6. 20 Investments: Common Stock
  7. 20 Investments: Convertible Security
  8. 20 Investments: Corporate Bond
  9. 20 Investments: Futures Contract
  10. 20 Investments: Life Insurance
  11. 20 Investments: The Money Market
  12. 20 Investments: Mortgage-Backed Securities
  13. 20 Investments: Municipal Bonds
  14. 20 Investments: Mutual Funds
  15. 20 Investments: Options (Stocks)
  16. 20 Investments: Preferred Stock
  17. 20 Investments: Real Estate & Property
  18. 20 Investments: Real Estate Investment Trusts (REITs)
  19. 20 Investments: Treasuries
  20. 20 Investments: Unit Investment Trusts (UITs)
  21. 20 Investments: Zero-Coupon Securities
  22. 20 Investments: Conclusion

20 Investments: The Money Market

What Is It?
The money market deals in fixed-income securities, not unlike the bond market. The major difference is that the money market deals in short-term debt and monetary instruments. In other words, money market instruments are forms of debt that mature in less than one year and are very liquid.

That sounds simple enough, so why don't more brokers offer you the ability to buy money market securities? The reason is that money market securities trade in very high denominations, giving the average investor limited access to them. The easiest way for retail investors to gain access is through money market mutual funds or a money market bank account. These accounts and funds pool together the assets of thousands of investors to buy money market securities.

Some investors also purchase Treasury bills (T-bills) and other money market instruments directly from Federal Reserve Banks or through other large financial institutions with direct access to these markets. There are several different instruments in the money market: certificates of deposit, T-bills, commercial paper, banker's acceptances and more.

Objectives and Risks
Institutional investors have used the money market as a safe haven for quite some time. The emergence of money market mutual funds has allowed individual investors to take part in the money market's rates of return, which are higher than those of a savings account or other low-risk investments. The performance of a money market fund depends heavily on the interest rate situation; the best time to put your money in money market funds is when interest rates are peaking.

Money market funds are low-risk investments because they invest in short-term government treasuries such as T-bills and in highly regarded corporations. The one downside of money market funds is that they are not covered by the same federal securities insurance that covers bank accounts, although some funds pursue insurance through private companies.

How To Buy or Sell It

Today, money market funds can be purchased through just about any bank or broker. If you are looking to invest directly in the money market, then you may need to get a full-service brokerage, although you can sometimes buy directly from the government. Minimum investment in a money market fund is usually around $500-$1,000, while investing directly in the money market can cost you anywhere from $1,000-$10,000 to start. (For an in-depth look at the money market, see our Money Market Tutorial.)



Strengths
  • Gains on money market funds are usually tax exempt because they invest mainly in government securities. However, any dividends are taxable.
  • Because they are a good low-risk investment, money market funds are widely used defensive investments when the stock markets are declining.

  • Weaknesses
  • Although returns on a money market fund are higher than those on a savings account, they are still much lower than returns on equities or bonds.
  • Some money market securities are very costly (easily in the $100,000 range), which makes it difficult for individual investors to purchase them.

  • Three Main Uses
  • Income Protection
  • Capital Appreciation
  • Tax-Exempt Savings
  • 20 Investments: Mortgage-Backed Securities

    1. 20 Investments: Introduction
    2. 20 Investments: American Depository Receipt (ADR)
    3. 20 Investments: Annuity
    4. 20 Investments: Closed-End Investment Fund
    5. 20 Investments: Collectibles
    6. 20 Investments: Common Stock
    7. 20 Investments: Convertible Security
    8. 20 Investments: Corporate Bond
    9. 20 Investments: Futures Contract
    10. 20 Investments: Life Insurance
    11. 20 Investments: The Money Market
    12. 20 Investments: Mortgage-Backed Securities
    13. 20 Investments: Municipal Bonds
    14. 20 Investments: Mutual Funds
    15. 20 Investments: Options (Stocks)
    16. 20 Investments: Preferred Stock
    17. 20 Investments: Real Estate & Property
    18. 20 Investments: Real Estate Investment Trusts (REITs)
    19. 20 Investments: Treasuries
    20. 20 Investments: Unit Investment Trusts (UITs)
    21. 20 Investments: Zero-Coupon Securities
    22. 20 Investments: Conclusion


    RELATED TERMS
    1. Collateralized Mortgage Obligation - CMO

      A type of mortgage-backed security in which principal repayments ...
    2. Interest

      The charge for the privilege of borrowing money, typically expressed ...
    3. Coupon

      The annual interest rate paid on a bond, expressed as a percentage ...
    4. Foreign Exchange Reserves

      Foreign exchange reserves are reserve assets held by a central ...
    5. Warrant

      A derivative that confers the right, but not the obligation, ...
    6. Private Equity

      Private Equity is equity capital that is not quoted on a public ...
    RELATED FAQS
    1. What is a derivative?

      A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
    2. What is after-hours trading? Am I able to trade at this time?

      After-hours trading (AHT) refers to the buying and selling of securities on major exchanges outside of specified regular ... Read Full Answer >>
    3. What is securitization?

      Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming ... Read Full Answer >>
    4. Are target-date retirement funds good investments?

      The main benefit of target-date retirement funds is convenience. If you really don't want to bother with your retirement ... Read Full Answer >>
    5. Do mutual funds require a demat account?

      A dematerialized account enables electronic transfer of funds. The account is used so an investor does not need to hold the ... Read Full Answer >>
    6. Where else can I save for retirement after I max out my Roth IRA?

      With uncertainty about the sustainability of Social Security benefits for future retirees, a lot of responsibility for saving ... Read Full Answer >>
    Hot Definitions
    1. Presidential Election Cycle (Theory)

      A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
    2. Super Bowl Indicator

      An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
    3. Flight To Quality

      The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
    4. Discouraged Worker

      A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
    5. Ponzimonium

      After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
    6. Quarterly Earnings Report

      A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
    Trading Center