what is the money market 
the money market refers to trading in very short term debt investments it involves continuous large volume trades between institutions and traders at the wholesale level it includes money market mutual funds bought by individual investors and money market accounts opened at banks at the retail level the money market is characterized by a high degree of safety and relatively low rates of return on investment understanding the money marketthe money market is one of the pillars of the global financial system it involves overnight swaps of vast amounts of money between banks and the u s government the majority of money market transactions are wholesale transactions that take place between financial institutions and companies institutions that participate in the money market include banks that lend to each other and to large companies in the euro currency and time deposit markets they also include companies that raise money by selling commercial paper into the market and investors who purchase bank cds as a safe place to park money in the short term some of those wholesale transactions eventually make their way into the hands of consumers as components of money market mutual funds and other investments who can invest in the money market individuals can invest in the money market by buying money market funds short term certificates of deposit cds municipal notes or u s treasury bills the money market has retail locations for individual investors they include local banks the u s government s treasurydirect website and brokerages the one buck baselinemoney market funds seek stability and security with the goal of never losing money and keeping net asset value nav at 1 this one buck nav baseline gave rise to the phrase break the buck some of the original investment is gone and investors will lose money if the value falls below the 1 level this scenario happens very rarely however it last occurred in 2008 and involved a fund that held assets of the bankrupt lehman brothers investment company its investors eventually received 98 cents on the dollar 1many money market funds aren t fdic insured so they can nonetheless lose money 2types of money market instrumentsthe wholesale money market is limited to companies and financial institutions that lend and borrow in amounts ranging from 5 million to well over 1 billion per transaction mutual funds offer baskets of these products to individual investors the net asset value nav of such funds is intended to stay at 1 money market accounts are a type of savings account they pay slightly higher interest rates than regular savings accounts but they often come with restrictions on withdrawing money or writing checks withdrawals are limited by federal regulations the bank will promptly convert the money market account to a checking account if the limits are exceeded banks typically calculate interest on a money market account daily and make a monthly credit to the account average interest rates for money market accounts can vary based on the amount deposited the best paying money market account advertised online as of july 2024 was offered by brilliant bank at 5 35 with a 1 000 minimum deposit 3money market accounts have become more popular because of their perceived safety compared to more volatile investments given a high interest rate market funds in money market accounts are insured by the federal deposit insurance corporation fdic when they re held at banks and the national credit union administration ncua when they re held in credit unions 24most certificates of deposit cds aren t strictly money market funds because they re sold with terms of up to 10 years cds with terms as short as three months to six months are available however larger deposits and longer terms yield better interest rates just as they do with money market accounts rates in early july 2024 ranged from about 5 35 to 6 00 the rates offered on a cd remain constant for the deposit period unlike with a money market account there s usually a penalty associated with an early withdrawal of funds from a cd they ve gained in popularity due to their safety and the relatively high rates available however the u s government issues treasury bills in the money market with maturities ranging from a few days to one year cash management bills come with maturities of a few days to one year 56primary dealers buy these bills in large amounts directly from the government to trade between themselves or to sell to individual investors individual investors can buy them directly from the government through the treasurydirect website or a bank or a broker state county and municipal governments also issue short term notes the commercial paper market is for buying and selling unsecured loans for corporations in need of a short term cash infusion only highly creditworthy companies participate in this market so the risks remain low commercial paper is a popular borrowing mechanism in the wholesale market because the interest rates are higher than for bank time deposits or treasury bills a greater range of maturities is available as well averaging about 30 days and extending up to nine months 7 the risk of default is significantly higher for commercial paper than for bank or government instruments however a banker s acceptance is a short term loan that s guaranteed by a bank used extensively in foreign trade a banker s acceptance is like a post dated check it serves as a guarantee that an importer who has ordered goods can pay for them there s a secondary market for buying and selling banker s acceptances at a discount eurodollars are dollar denominated deposits held in foreign banks so they re not subject to federal reserve regulations very large deposits of eurodollars are held in banks in the cayman islands and the bahamas money market funds foreign banks and large corporations invest in them because they pay a slightly higher interest rate than u s government debt the repo or repurchase agreement is part of the overnight lending money market treasury bills or other government securities are sold to another party with an agreement to repurchase them at a set price on a set date money markets vs capital marketsthe money market is defined as dealing in debt of less than one year it s used primarily by governments and corporations to keep their cash flows steady and by investors to make a modest profit the capital market is dedicated to the sale and purchase of long term debt and equity instruments the term capital markets refers to the entirety of the stock and bond markets stocks have no expiration date unless the company itself ceases to operate unlike many money market products advantages and disadvantages of money marketsmost money market securities are considered extremely low risk due to the protection of fdic insurance backing by a government or bank or the high creditworthiness of the borrowers they re also very liquid they can readily be exchanged for cash at short notice the tradeoff is that these investments have low returns money markets generally underperform other asset classes and often don t even keep pace with inflation any fees associated with an account can easily eat into these slim returns and these advantages don t extend to all money market securities some aren t fdic insured and there s a chance that even the most trustworthy borrowers may default some money market accounts have minimum balance requirements or restrictions on withdrawals extremely low riskmay be insured by fdichighly liquidhigher returns than most bank accountslow returns that may not keep pace with inflationnot all money market securities are insuredmay have high minimum investments or withdrawal restrictions