1. 25 Investments: Introduction
  2. 25 Investments: American Depository Receipt (ADR)
  3. 25 Investments: Annuity
  4. 25 Investments: Art and Collectibles
  5. 25 Investments: Bonds
  6. 25 Investments: Cash
  7. 25 Investments: Closed-End Investment Fund
  8. 25 Investments: Common Stock
  9. 25 Investments: Convertible Bonds
  10. 25 Investments: Corporate Bond
  11. 25 Investments: Futures Contract
  12. 25 Investments: Life Insurance
  13. 25 Investments: The Money Market
  14. 25 Investments: Mortgage-Backed Securities
  15. 25 Investments: Municipal Bonds
  16. 25 Investments: Mutual Funds
  17. 25 Investments: Options (Stocks)
  18. 25 Investments: Exchange-Traded Funds
  19. 25 Investments: Preferred Stock
  20. 25 Investments: Private Equity
  21. 25 Investments: Real Estate & Property
  22. 25 Investments: Real Estate Investment Trusts (REITs)
  23. 25 Investments: U.S. Treasury Securities
  24. 25 Investments: Unit Investment Trusts (UITs)
  25. 25 Investments: Venture Capital
  26. 25 Investments: Zero-Coupon Securities
  27. 25 Investments: Conclusion

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. (Related: Money Market - Video)

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

 

 

 


25 Investments: Mortgage-Backed Securities
Related Articles
  1. Investing

    The Pros and Cons of Money Market Funds

    Find out whether socking your money away in these accounts will stand up to the test of time.
  2. Investing

    Introduction To Money Market Mutual Funds

    Learn about the easiest way to benefit from money market securities.
  3. Retirement

    Introduction To Retirement Money Market Accounts

    Money market funds are used in retirement plans and accounts because they are liquid, stable and pay competitive rates of interest.
  4. Investing

    Getting To Know The Money Market

    If you need liquidity and safety on a sum of money, don't forgo potential interest by keeping the funds as cash.
  5. Investing

    Do Money Market Funds Pay?

    This investment provides security, but its returns may not be adequate for long-term investors.
  6. Investing

    Why Money Market Funds Break The Buck

    These funds are noted for their safety in a rough market. Read on to find out why.
  7. Personal Finance

    5 Mistakes You're Making With Money Market Accounts

    Money market accounts can be helpful "parking spots" for investors. Here are five key things to keep in mind when opening an account.
  8. Investing

    The Money Market

    The money market provides a relatively stable place to park capital that may be needed within a short time horizon.
  9. Investing

    Financial markets: Capital vs. Money Markets

    There are several key differences between capital markets and money markets as components of financial markets. Check out the similarities and differences between the two markets.
Frequently Asked Questions
  1. What should I use as a benchmark for my small-cap stock portfolio?

    The Russell 2000 and S&P SmallCap 600 are two of the best indexes to use as a benchmark for small-cap performance.
  2. What is the broken window fallacy?

    Learn about the broken window fallacy. The broken window fallacy is a parable first used by French economist Frederic Bastiat ...
  3. What are the listing requirements for the Nasdaq?

    Learn what it takes to be on the Nasdaq. Only companies with a solid history and top-notch management behind them are considered.
  4. What is the financial services sector?

    The financial services sector consists of a diverse group of companies that goes beyond banks and credit unions.
Trading Center