Three Main Uses Income Protection Capital Appreciation Tax-exempt Savings

What is it?
The money market is a fixed income market, similar to the bond market. The major difference is the money market is a securities market dealing in short-term debt and monetary instruments. Money market instruments are forms of debt that mature in less than one year and are very liquid.

That sounds simple enough, so why do most brokers not offer you the ability to buy money market securities? The reason is money market securities trade in very high denominations, giving the individual investor limited access. 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 and buy money market securities.

Some investors also purchase treasury 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 , Bankers Acceptances , and more.

Objectives and Risks:
The money market has been used as a safe haven for institutional investors for quite some time. The emergence of money market mutual funds has allowed individual investors to take part in the higher rates of return the money market has, at least compared to a savings account or other low risk investments. Performance of a money market fund depends heavily on the interest rate situation, the best time to put your money in money market funds are when interest rates are peaking.

Money market funds are low risk investments because they invest in short term government treasuries like T-bills and highly regarded corporations. The one downside with money market funds is that they are not covered by the same federal securities insurance that bank accounts are, although some funds pursue insurance through private companies.

How to Buy or Sell it:
Today money market funds can be purchases 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, though you can sometimes buy directly from the government. Minimum investment in a money market fund is usually around $500-$1000, while investing in the money market directly can start anywhere from $1,000 - $10,000.

Strengths:

gains on money market funds are usually tax exempt because they invest mainly in government securities, any dividends are taxable. a good low risk investment, is a widely used defensive investment when the stock markets are declining.

Weaknesses:

even though returns on a money market fund are higher than a savings account, they are still much lower than equities or bonds. some money market securities are very costly (can be easily in the $100,000s) which makes it difficult for individual investors to purchase.

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