Money markets offer an alternative to higher-risk investments during a volatile stock market or economic downturn.
Money markets offer an alternative to higher-risk investments, especially when the stock market is volatile, according to Investopedia's introduction to money markets. There are several types of money- market securities, including treasury bills (T-bills), certificates of deposit (CD), and commercial paper. The average investors usually chooses a money-market fund.
Money Market Deposit Account
One feature of a money market is that investors can open a deposit account. This is a type of savings account that shares some characteristics of a money-market fund. Accounts are insured by the federal government and are managed by banks or brokerages. They are a convenient place to store money that will be used for upcoming investments or that has been received from the sale of recent investments, according to Investorwords.com. They are considered to be safe and highly liquid investments.
Transaction Limitations
Money-market accounts can be set up online through web sites like E-Trade. Under federal regulations, anyone with a money market account -- regardless of how or where the account was set up -- is limited to six withdrawals or transfers from the account during a calendar month, according to the E-Trade website. Inbound quick transfers are not subject to any limits.
Short Maturity Time
Money-market securities are characterized by trading in low-yield, short-term government and corporate debt, according to Marketswiki. One of the most popular money market securities is the T-bill, which matures in one year or less. They are issued with three-month, six-month and one-year maturities. Commercial paper sells at a high cost but is affordable to the average investor if purchased through a money market fund. This is an unsecured short-term loan issued by a corporation. with a maturity of no longer than nine months, according to Investopedia.
Lower Trading Cost
Most investors build a portfolio through a money-market fund or by purchasing money-market securities. A mutual fund is a company that brings together money from many individuals and invests it in bonds, stocks, or other assets. The mutual fund manager invests the pooled money in specific assets. Pooling money in a mutual fund enables investors to purchase assets at a lower trading cost. It also enables them to diversify, according to a Marketswiki report on mutual funds.
