The money market refers to short-term debt products characterized by high safety and low returns. On the wholesale level, the money market involves high-volume trades between institutions and the government. Retail investors can invest in securities like money market mutual funds, money market accounts and Treasury bills.

Money markets, explained

The money market involves swaps of cash and debts that range from overnight up to one year. Nations, banks and corporations use the money market to stabilize cash flows and meet near-term cash needs or regulatory requirements. At the wholesale level, transactions can range from $5 million to over $1 billion.

Retail investors can participate by buying debt securities like Treasuries or wholesale transactions bundled into money market funds or accounts. These investments generally pay modest interest in return for depositing or investing funds.

Types of money market instruments

You can broadly divide money market securities into two groups: those available wholesale, and those offered to retail investors. Generally, the primary difference is that wholesale transactions are packaged into retail investor-friendly securities. But they’re all characterized by high liquidity, low risk and short-term debt.

Retail investor-friendly securities include:

• Money market funds that offer baskets of money market securities, similar to a mutual fund. Shares typically trade for $1. 
• Money market accounts are savings accounts that offer slightly higher interest rates than standard accounts. They usually come with FDIC or NCUA insurance and offer limited withdrawal and check-writing rights.  
• Certificates of deposit (CDs) are notes offered against deposited funds that earn set interest for a specified term. They’re not all considered money market funds, as some terms extend up to 10 years, but short-term CDs do exist. 
• Treasury bills are short-term U.S. government-issued notes that mature in a year or less. They’re considered some of the safest debt instruments available. 

Often, these investments are based on money market debts like:

• Commercial paper, which involves trading unsecured loans from corporations in need of short-term cash infusions. While interest rates run higher, the risk of default is higher, too. 
• Eurocurrency, which refers to currency held in a country outside its origin, for example U.S. dollars in a British bank. Foreign banks, large corporations and money market funds invest in eurocurrencies due to higher interest rates. 
• Repos, or repurchase agreements, involve selling government securities with an agreement to repurchase them at a set price and later date. 

What this means for you

Individual investors can buy into the money market through funds, short-term CDs and Treasuries. Money market accounts also make popular (and safe) investments thanks to their liquidity and FDIC insurance.

However, most of these investments – money market accounts included – pay very low interest rates, resulting in disappointingly low returns compared to riskier assets. And some accounts, like CDs, may charge fees or penalties for early withdrawals.

While the money market is relatively safe, there’s no such thing as a sure thing in investing. But if you want to earn money on cash-based holdings, Q.ai’s Cash Reserve Kit may be a great option.

Whether you want to use our Cash Reserve as a savings account or rely on cash-based holdings in your portfolio, you can rest assured you’ll get 24/7, no-deposit minimum, no-fee access to your cash.

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