Basics of Money


Master the Money Market

The money market is a collective name that describes all the different ways in which governments, banks, corporations and securities dealers borrow and lend money for short periods.

QUIZ: Kiplinger's Personal Finance Quiz

Money-market loans may be due in a few days, a few weeks or a few months, but never more than a year. Thus, short-term certificates of deposit are considered to be in the money market. Treasury bills, which mature in three, six, nine or 12 months, are money-market instruments. Other short-term investments that could be in a typical money-market portfolio include:

  • Other federal government securities (short-term securities issued by individual government agencies or government-sponsored organizations such as Fannie Mae).
  • Banker's acceptances (used to finance international commercial transactions).
  • Repurchase agreements, or "repos" (ways of selling financial holdings for a day or two with a pledge to buy them back at a higher price).
  • Eurodollar CDs (issued by the foreign branches of U.S. banks).
  • Yankee CDs (issued by U.S. branches of foreign banks).
  • Short-term municipal bonds issued by state and local governments (money-market mutual funds that invest exclusively in these pay tax-free earnings).

Short maturities help insulate the value of a money market portfolio from movements in interest rates. Prices of interest-paying investments such as these fall when rates rise, and vice versa -- the shorter the maturity, the smaller the move.

There are two ways individual investors typically participate in the money market, through FDIC-insured bank accounts, or through uninsured mutual funds. Lets take a closer look at each.

Money-market deposit accounts

Money-market deposit account (MMDA) offer federal insurance plus interest that's somewhere between a passbook account and a CD. Banks and thrifts like to boast about the higher rates paid by these accounts, but in fact they rarely compete very well with certificates and routinely lag money-market mutual funds.

MMDAs probably compete more directly with low-rate savings accounts and interest-paying checking accounts, except for all the strings attached: You can write a limited number of checks on the account and make a limited number of withdrawals; if you exceed the limit, you pay a penalty.

When shopping for money-market accounts you'll want to compare:

  • Annual percentage yield.
  • Minimum deposit.
  • Minimum balance requirements.
  • Check-writing limits.
  • Fees and penalties.

Money-market funds

If you compare MMDAs with money-market funds, the limits on liquidity and typically lower rates add up to a high premium to pay for federal deposit insurance.

Money funds generally pay more than deposit accounts, with no significant increase in risk.

The minimum initial investment usually ranges from $1,000 to $5,000, for which you get a slice of a portfolio containing a number of money market investments that you could never afford on your own.

One of the most attractive features of money-market funds is that you can redeem your shares anytime by writing a check drawn on your account. You pay no sales fees either buying or selling.

SEE ALSO: The Biggest Mistakes Investors Make

The funds' managers, who decide which money-market instruments to buy, charge a modest management fee, on the order of 1% or so. All that makes the funds liquid, convenient and relatively economical to own.


Copyright 2016 The Kiplinger Washington Editors

More from

See more stories in this category

Back to Previous Page

Basics of Money

5 'Strong Buy' Dividend Stocks With High Upside

The markets are looking perilous right now, with rising trade tensions and Federal Reserve uncertainty...

13 Ways to Simplify Your Finances

We know you're stressed out. With everything you're expected to keep up with in a day, it may help to...

How to Find the Right Online Bank for You

[Question]I want to open an online high-yield savings or money market account. But because these are...

Hillbilly Elegy

Author: J.D. Vance Publisher: HarperCollins Publishers, 288 pages Subtitled "A Memoir of a Family...

The Big Short

Author: Michael Lewis Publisher: Norton, W. W. & Company, Inc., 320 pages Dive into the financial...

Next Page >
Provided by Kiplinger