The modern economy can be so confusing owing to its complexity especially for people who are venturing into investments. As such there are various ways that can be used to invest your money, with recent options being introduced by financial companies on a daily basis. This shows the significance of making sound option when it comes to making financial decisions both large and small.
One of the most elementary monetary decisions encountered by most people is where to put their money so that it grows at an efficient rate. Most people regard stock markets as a sound choice compared to other financial institutions simply because they offer different advantages and can provide substantial returns. Nevertheless, the safeties of investing money in stocks and shares can shrink significantly as the risks associated with irregular trends and fluctuations multiply. Such risks can often frighten off investors and make them to find other alternatives places to invest their funds.
The money market provides an exciting investment decision that is normally safe and more conventional than the stock market. Before going into detail about markets it’s of paramount importance to understand what the money market entails.
What is the money market?
Simply put, the money market comprises of a subsection of the fixed income market. The money market is a type of investment opportunity that focuses on short-term debt securities. Securities traded on the money market can be issued to individual investors by the government, large corporations, or other financial firms as a highly safe form of a liquid asset – in simple terms, an ‘IOU’.
Cash Market vs. Stock Market
Besides the returns, another discrepancy between the money market and the stock market is the value of the denominations traded. Normally speaking, the money market deals only in high denominations, which can reduce its accessibility to individual investors (also explaining why it is predominantly the domain of larger financial entities).
The money market is also classified as a dealer market, meaning that transactions are candidly done within various firms’ accounts, without the need for a central trading floor or brokers.
How to “invest” in a money market account
Perhaps the easiest and most ordinary way for individual investors to access the money market is through money market mutual funds or a money market bank account. These funds are usually obtainable by banks or other financial institutions, and work by taking the funds of many investors and using them to acquire money market securities on their behalf.
Some large corporations with pre-existing access to the money market may also provide investors the chance to acquire money market assets by proxy. Some banks may also offer packages whereby the bank chooses the best investment for your money from a list of high-performing funds.
In practice, most money market accounts work much like normal savings accounts. As a money market account holder, the bank to fund loans to other people uses the money you deposit into this account. In return, the bank pays you interest on the amount deposited. By charging a slightly higher interest rate on these loans than the one paid to you on your deposit, the bank is able to continue turning over a profit.
Money market interest rates
Interest on money market accounts is usually compounded and paid out on a monthly basis thus providing a separate advantage to the investor of the bank paying you interest not only on your initial deposit, but also on the accumulated interest the bank regularly pays out.
Of course, in the competitive financial market, interest rates on money market accounts can significantly differ. Some banks may also propose different interest rates depending on the amount of money currently invested in the account. As such, it’s best to explore and compare many options before deciding on the account that is best for you.
Other distinct benefits
Like savings accounts, money market accounts allow you:
- To withdraw money from your account on demand. However, in order to maintain the level of security for which the money market is known, many banks only allow you a limited number of withdrawals per month (some may allow additional withdrawals, but include a surcharge on any that exceed the predetermined limit). Many may also enforce a minimum balance that needs to be maintained in the account itself.
- Open a money market account, thereby providing you with a register book to keep track of your initial and subsequent deposits, withdrawals, and the amount of interest earned on your money.
- The bank will also send you a monthly statement that will list all your transactions as well as fees and interest earned. By reconciling these two financial records, you can take better control of your own money management.