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.