Money Markets &
you’ve decided that keeping your cash as cash will not help you meet
your financial goals in the time frame set for yourself. Why not
keep your cash under the mattress or in a savings account? Because
inflation (the rising price of goods) will diminish your purchasing power
you may be able to invest with little to no risk, and possibly keep pace
with inflation by investing in the “money market.” The money
market (as distinguished from the capital market), is comprised of:
treasury bills, municipal notes, certificates of deposit (CDs), commercial
paper, federal funds, repurchase agreements, call loans, and banker’s
acceptances. Let’s discuss the two investments most everyday
people use – CDs and money market funds.
are certificates that are issued by banks and thrift institutions, and can
be purchased at banks, thrift institutions and some brokerage firms.
When you get a CD, the issuer is establishing that you have deposited
funds for a specified period of time. When that time has ended, your
CD has matured. Upon maturity, your CD will have earned the fixed
rate of interest promised to you. Plus, you would then have use of the
original principal that you invested.
are a variety of types of CDs, currently paying between 4.5 and 8%
depending on the maturity period and the risk that it will be called away
(that is, “callable”) by the issuer before it matures. With a
callable CD, the issuer may “buy” it back from you before it matures.
On the one hand, callable CDs may have a higher interest rate to
compensate the investor for the risk of being called. On the other hand,
once the CD is called, you may not be able to reinvest at a time when
interest rates are as high as when you purchased the CD initially.
money market fund is an investment company managed by an investment
manager who is responsible for investing in a combination of treasury
bills, municipal notes, certificates of deposit (CDs), commercial paper,
federal funds, repurchase agreements, call loans, and or banker’s
acceptances. The manager invests pooled cash from a variety of
investors. The advantage is that the investor owns shares of the
company, not the underlying investments. Therefore, it’s liquid
(easily converted to cash) and currently pays higher interest (about 4 –
5 % if taxable, about 2 –3 % if non-taxable) than a regular passbook
it sounds all good, it’s important to remember a few things. Money
market funds tend to pay less interest than CDs. Also, if you open a
money market account to replace your checking account at the bank, ask
whether the monies are insured. In most cases, money market
investments are not insured by the FDIC and other entities.
can attempt to keep pace with inflation by investing in CDs and money
market funds, but understand that you aren’t working your money to the
fullest because the risk is relatively low. In the world of
investing, no meaningful risk means no meaningful reward. But
jumping into riskier investments without understanding the potential for
loss is not the way to begin investing. If you are new to making
conscious decisions about your money, start conservatively and work your
way into moderate, then aggressive risk. The more you understand,
the less frightening it will become.
© 2000, Marabella Books