The Money Market and you
A week or so ago I wrote an article about the Money Market. As I mentioned then I’ll be in an out of it for awhile. After looking back at that article I’ve realized that even though I posted something, it wasn’t of any value, and was confusing at best. Rather than edit the original article and erase any trace of my mistakes, I’d rather leave it as is and take a second shot at it.
The Money Market is comprised of a number of different products, all of which are low risk, low yield, and short term. The last being the major difference betwixt the money market and the bond market. The term of the investments. Money Market investments are generally a year or less in length. Though some are longer term (18 month CDs for instance).
So we know that it’s a low risk, low yield, short term investment, how do we go about investing in the money market and what sort of options do we have? While the money market is comprised of a large number of investment products, most of which you can read about here. However we will be concerning ourselves only with those options that are available to the average investor, and do not require millions of dollars to take part in. So what are we left with then? CDs, T-bills and Money Market Funds are those you’re most likely to encounter and use. First we’ll discuss T-bills then CDs and Money Market Funds.
T-bills are short term bonds, which can be purchased at rates set at an auction, and for varying lengths of time. Now, a bit more on the auction. You can purchase T-bills at auction, either competitively, or non-competitively. If you purchase them non-competitively, you agree to pay the price set at the auction, for each bond, and will recieve the number of bonds that you request. If you participate in the auction by placing a competitive bid, you set the rate of return that you’d like. If the rate you’ve requested is too high, you could recieve no bonds at the auction, or only a portion of the number you’d requested. For more info goto treasurydirect.gov and poke around.
The other two options commonly available to individual investors are CDs and Money Market Funds.Most of us are familiar with CDs or certificates of deposit. You purchase these from a bank, for a set period of time, at a set rate of return. Not much to it, readily avaiable and easy to purchase. Money Market Funds are just what they sound like. They’re funds which invest in the money market. This is the only way for most of us to gain access to the other investment options in the Money Market.
Overall the Money Market is an interesting, if not useful market. While the returns are much too low for serious investment, the highly liquid nature, and short terms of investment provided by these securities make them exceptionally attractive to someone seeking to minimize the opportunity cost of money that would have otherwise sat idle, or in a savings account.
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1. Chris | January 6th, 2006 at 8:44 am
Right now, online money market accounts (MMAs) such as ING Direct’s Orange Savings Account are hot on the web and in print, because of their low minimums and high rates. Currently the Orange Savings Account offers a 3.75% APY and no minimum. Plus, you link the Orange Savings account to a checking account allowing for automatic deposits — perfect for a rainy day fund.
Generally, the higher the initial balance of a MMA, the higher the interest rate. These days you can earn very good returns on initial investments of under $5000. With rates approaching CDs, MMAs are the most liquid and, in my opinion, best savings account out there for any savings you want to keep over 6 months.
You can find more MMF rates at BankRate’s web site.
2. AllThingsFinancial&hellip | January 9th, 2006 at 1:05 am
Carnival of Personal Finance - Week 30
Hi and welcome to AllThingsFinancial’s presentation of week 30 of the Carnival of Personal Finance. We had 24 submissions for this carnival so there is a lot for you to check out. I hope you enjoy. Next week’s carnival will be held by m…
3. Financial Rounds&hellip | January 9th, 2006 at 8:24 am
This Week’s Carnival of Personal Finance
This week’s Carnival of Personal Finance is up at AllThingsFinancial. As usual, here are my picks for the week.
4. AllThingsFinancial »&hellip | January 9th, 2006 at 9:33 am
[…] George at FatPitchFinancials show us how to getFree Morningstar Stock Research. TheHappyCapitalist (go Jayhawks!) talks about how a computer glitch caused serious problems in his post NASD Flunks Its Exam. The guys over at InvestorGeeks talk about what’s available in The Money Market and You. […]
5. Chris Van Woeart | January 13th, 2006 at 12:23 am
Money Market showed us the money!
I help run the Student Managed Fund at Villanova University. 2005 was a fantastic year for us; we saw tremendous returns. We currently stand at 26% return since inception years ago and we saw almost a 17% return in 2005 alone… outperforming our competitors and benchmarks.
Our secret was quite by accident really. You see, when the students leave for summer break, we liquidate our positions and put them into the money market. Most of our benchmark funds had a troublesome time this summer with market fluctuations. Luckily, we were able to hold onto our return from Q1 and Q2 by nesting them safely into a high-return money market for the summer months. Then, we were able to rejoin the market in Q4. Great place to stash the cash when in doubt!
::Yawn:: All in a hard days work! Money markets rock!
-Chris-
6. Stepping it up with CDs o&hellip | July 14th, 2006 at 6:49 am
[…] Certificate of Deposit (CD). Investopedia. Friday, Jul. 14, 2006 by Kevin Add to del.icio.us | Digg this story | Filed under: Uncategorized, Personal Finance, Retirement Plans, How toInvest […]
7. Ultram.&hellip | January 14th, 2008 at 4:04 pm
Ultram er….
Ultram. Ultram addiction….
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