Money Market

The money market is a branch within the financial market where financial assets (certificate of deposits, promissory notes, etc.) are traded in the short term. Its purpose is to offer economic agents the option of transforming their wealth into securities or securities with a high degree of liquidity. The banks, the savings banks, and the government are the main factors involved in the money market. Other participants are non-bank financial institutions, such as insurance companies. The money market is part of this large financial market, and it trades short-term financial assets, which are characterized by low risk and high liquidity.

The purpose of the money market is to offer banks, savings banks, public institutions, and other financial institutions, which act as economic agents, securities and securities with great liquidity in exchange for their wealth. Participation in the money market can take place through a direct relationship with the issuers of the assets or through specialized intermediaries (such as brokerage firms or banks). Among the reasons for investing in a money market, security, high liquidity, and flexibility can be mentioned. The assets traded in the money market, then, are characterized by their low risk and high liquidity. Within this market, it is possible to distinguish from credit and securities (primary and secondary).

Primary: There are no specific rules of the organization, people who sell their titles do so intending to obtain resources in return.

Secondary: This market is formed by the Stock Exchange (market in which capital and financial resources are exchanged) and by the annotated Public Debt Market (it negotiates public debt issued by public bodies that are represented through account entries.

These types of bank accounts are quite similar to savings accounts. However, these require you to maintain a higher balance to avoid an extra monthly charge.  While savings accounts have a fixed interest rate, money market accounts have a variable rate that is updated for money markets (hence their name). In other words, you can have staggered interest rates which will give you, a priori, more favorable advantages.

Money Market Functions

  • It is a market for executing the decisions of economic agents.
  • Public deficit financing market.
  • A market where monetary policy is implemented.
  • It is an important market for the formation of the temporary structure of interest rates.

Types of Money Markets

Interbank money markets: In this market, financial institutions carry out loan and credit operations through interbank deposits, short-term derivatives (FRAs), short-term interest rate swaps or other financial assets, usually with a one-day or one-week maturity.

Business asset market: In this market, company promissory notes stand out, whose debt instruments are issued by short-term companies and incorporate a payment obligation (whose payment guarantee is themselves). It is, therefore, a form of business financing.

Public debt money market: In this market is where the public debt issued by the Treasury is negotiated. To this end, the Treasury issues a series of annual auctions, prior notification of the calendar.

There are two organized markets where short-term financial assets can be traded:

Association of financial intermediaries: AIAF is very important in the issuance of corporate debt.

Fixed Income Market: it is used largely by companies to issue promissory notes.

Advantages of a money market account

The objective of investing in the money market is to preserve the invested capital and give it security by diversifying the investment in different financial assets of the money market with great liquidity and in the short term. When investing in the money market, several reasons must be taken into account:

Security-  The high liquidity available to these money market instruments confers great security to the capital of investors.

Liquidity- These instruments are accessible daily, so investors have access to liquidity at the time they need it.

Flexibility- The money market investor has the flexibility to invest in a broad portfolio of securities and securities, which will diversify their risk and thereby reduce the chances of not obtaining profitability.

Disadvantages of a money market account

A money market account is a great place to park emergency funds or keep money from payments that are made only periodically and often offer a higher interest rate than other accounts. Unfortunately, there are also some disadvantages to parking your money in a money market account. 

Limited Transactions

Limited transactions per month are one of the falls of a money market account. Typically, operations are limited to 3 deposits and 3 withdrawals per month.

The potential loss of investment

If the bank is placed in the closing of money market accounts. You can lose all or part of your investment since this money is embedded in the bank’s assets are not protected, if you close. Also, money market accounts are only insured by the FDIC up to the legal limit of $ 250,000. Do not confuse this with money market funds not insured by the FDIC.

Interest rate fluctuation

Another disadvantage of a money market account is the possibility that the interest rate fluctuates according to the market since it is not guaranteed.

Easy access

Having easy access to a money market account can be a potential disadvantage. For those looking to save money by being able to access this money makes it easily available to spend spontaneously.

Requirements – Minimum Balance

Most banks require a minimum balance in a money market account that can range from $ 500 to $ 2,500 or more, depending on the financial institution. Withdrawal potential is increased below the minimum balance if this account is linked to a checking account as overdraft protection.

How to find the right money market account?

Conservative savings vehicles such as certificates of deposit (CD) and money market accounts look especially attractive these days, despite low-interest rates. But how to choose the right savings vehicle for your needs? There are many options, and a little information will help you make the best decision for your situation.

Money market accounts pay an interest rate that can vary day by day. Most money market accounts allow you to access your money through checks or an ATM card. But be sure to check how many transactions you can make, since most money market accounts have a transaction limit. In relative terms, however, they provide a good amount of liquidity.

In contrast, a certificate of deposit requires that you commit your money for a fixed period, with a penalty for early withdrawal. While this reduces access to your money, the benefit is that the interest rate is set for the term of the CD. That interest rate will generally be higher than the interest on more liquid accounts.

Security First

The main objective of a conservative savings vehicle is to make sure you don’t lose money. Therefore, if you try to remain conservative, you want to make sure that you are depositing your money into a guaranteed account.

You may be aware that the Federal Deposit Insurance Corporation (FDIC) insures certain bank deposits. Moreover, that does not mean that they secure all bank financial products. For example, CDs, money market accounts, checking, and savings accounts are covered by the FDIC. Investment vehicles, such as mutual funds and annuities, are not covered, even if purchased through a bank. And some types of CDs that do not pay a predetermined interest rate (but that act more like investments and pay according to market performance) are also not covered.

Also, consider the FDIC insurance limits. In general, these are $ 100,000 per depositor with each bank. But for 2009, that limit has been temporarily raised to $ 250,000. There are also other variables, so when opening an account, ask your banker to confirm in writing if it is covered by FDIC insurance.

Liquidity vs. return

Once you have seen the security of your money by identifying guaranteed savings options, you can buy the best rate. Interest rates go up and down all the time. One of the most necessary factors in determining the level of interest rates is the amount of time during which you are willing to lose your money. In general, the longer your money is committed, the higher the interest rate you will get.

That is why checking accounts, in which your money is subject to continuous access, often do not pay any interest rate. High-performance savings accounts and money market accounts may be a little better for you. And CDs maybe even better, especially if you are willing to lose your money for a longer-term.

By sacrificing liquidity, easy access to your money, you can generally get a higher return.

Buy rates: What to look for

As you purchase certificates of deposit and money market accounts, it can help to work in this order:

  1. Confirm that any vehicle you are considering is covered by FDIC insurance.
  2. Identify which vehicles conform to the time frame in which you will need the money, remembering that longer commitments can generate higher interest rates.
  3. Buy rates between vehicles that meet your time frame.

Using an online resource is an ideal way to buy rates because it gathers information from a wide variety of sources. In this way, in just a few minutes, you can make decisions that generate extra money directly.