Understanding a Money Market Account

September 5, 2008 · Posted in Finance, Money 

Money market accounts and money market funds are not the same thing. To understand the difference between both of them, it is best to start at understanding “money market”. Money Market is basically a generic term used to describe the market that banks and other financial establishments lend, borrow and trade money, Certificates of Deposit and other items.

The Money Market Account is basically a premium account, like a high interest savings account. Money Market Accounts are commonly just called an MMA. This Money Market Account shouldn’t be confused with the Money Market Fund. The Money Market Fund is basically an investment strategy that yields larger returns than a premium savings account. A Money market Account (MMA) can be opened very simply at just about any bank. The money kept in a Money Market Account will be invested, but the bank or financial institution does the investing and collects on the returns as well.

The money you invest in an MMA is usually placed into an investment like a CD or Certificate of Deposit, Treasury bill, or other safe financial instrument. These are all lower risk, short term investments. What is your benefit from allowing the financial institution to use your money? You benefit by receiving a premium interest rate that can occasionally be twice as high as a regular passbook account.

Like any other account with a bank, a Money Market Account from the bank is also insured by the FDIC (Federal Deposit Insurance Corporation) for up to one hundred thousand dollars. While you can find what seems like a better deal on a Money Market Account offered from a bigger corporation, keep in mind that the FDIC doesn’t insure those account as they do at a bank. If that corporation happens to file bankruptcy, your money is long gone.

Although Money Market Accounts have a decent lower risk investment, you might want to remember that because it is an investment, there are some restrictions. Your money is less liquid that it would be in a regular savings account. Also, Money Market Accounts usually require both a minimum deposit as well as a maintained minimum balance. Interestingly enough, although you are able to make withdrawals from your Money market Account, there is a limit to how many you can make in a month’s time frame. You also can’t withdraw an amount, or combination of amount that would cause the balance in the Money Market Account to fall below the minimum. If you do, there are usually penalties.


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