What Is A Money Market Account?

A Money Market Definition

So what is a money market account? This is a type of account offered by banks and other financial institutions that is very similar to a standard savings account. The difference with this type of account is that it generally pays a higher interest rate.



The drawback for this higher rate is that a higher minimum balance if often required ($1000-$2500) and fewer withdrawals are allowed. Like a checking account you also have the ability to write up to 3 checks per month.

A money market is what the name suggests! It is a market for short-term deposits of cash. It is one of the most liquid forms of financial market.

A short-term deposit made in a money market (deposits are generally made by large corporations, governments, financial institutions and banks) might be for a week or a month or even overnight. This all cash environment means that the sums of money moving into and out of these markets is truly enormous.

For a private investor, it is very difficult to access a money market unless doing so through a specialised fund or bank account. Such funds are virtually risk free (in terms of capital preservation, and not including inflation) and offer a very low risk way of holding money that may be required at quite short notice (not immediate notice though).

This helpful article explains how a money market account works and contrasts them with the other main cash equivalent, a certificate of deposit.

Another benefit to a money market account is that your deposit is FDIC insured (Federal Deposit Insurance Corporation), this means that should the bank become bankrupt you money is safe and you will receive your deposit back through this federal insurance program. Money deposited into a credit unions is insured through NCUA (National Credit Union Administration) also a federal agency.

Interest paid on these account is compounded daily and paid monthly. This interest is then applied back to the principle amount, you are then paid interest on the interest - Free Money! That’s what we like! The interest paid can vary greatly, so shop around for the best deal.

The drawbacks to a money market account as mentioned before is the lack of flexibility, fee’s are payable (usually $5-$10 per occurrence) for falling below the minimum balance, exceeding the number of monthly withdrawals an so on.