What are money market accounts?
These days there is no shortage of investment options available and this can be confusing to a lot of people. Most people have heard of money market accounts even though they may not be entirely sure of what they are. It is a good idea to find out because they are a very useful investment to have.
A money market account is basically an investment that acts something like a combination of a mutual fund and a bank account. It is similar to a mutual fund in that investors pool their money so that it can be
invested by a professional manager. In the case of money market accounts they invest in short term debt. At the same time a money market account is similar to a bank account because you can usually invest in
them through your bank, you can withdraw money from them any time that you want and in most cases you can even write checks on the account.
There is one way in which money market accounts are different from most others and that is the goal of the account. The goal is to maintain the initial value of the account at a constant level. Therefore unlike a mutual fund where the goal is to increase the value of the account in the case of the money market it is to keep a steady value. Instead of increasing the value investors are paid a dividend on a regular basis, this is similar to receiving interest on a bank account. However the difference here is that you don't get a set interest rate like you would with a bank account. Instead you are paid based on how well the fund has performed.
The question that a lot of people have is why would they invest in a money market account? The answer is that it is a great way to maintain stability in their investment portfolio. These accounts are normally very safe investments so there is not a lot of risk. In fact they are so safe that most people treat them more like savings accounts than they do investments. A lot of people simply use a money market account rather than a savings account for the money that they expect to need in the short term because they can get a higher return on it.
The easiest way to open a money market account is to do it through your bank. Almost all banks offer them which is really an indicator of just how safe these accounts are. You do have other options however and you can open a money market account through your brokerage firm as well. One thing to be aware of is that although money market accounts are very safe they are not insured like a bank account would be so you do have to make sure that you are buying from a reputable place.