To understand money market accounts and funds, it helps to know the difference between the two, and to understand what the “money market” is to begin with. It is simply a generic name used to describe the market wherein banks and other financial institutions lend, borrow and trade money, Certificates of Deposit (CDs) and other financial instruments.
A money market account is basically a premium account, or a high interest savings account. Also known as an MMA, this type of account should not be mistaken for a money market fund. A fund is an investment strategy with larger returns than a premium savings account. An MMA can be opened very simply at almost any bank. The money you keep in such an account will be invested, but the bank or other institution does the investing and collects the return.
Your money is usually put into investments like CDs, Treasury Bills, or other safe financial instruments. Each of these are low risk, short-term investments. Your reward for allowing the financial institution to use your money is a premium interest rate, one that may be up to twice as high as a typical passbook account.
Like other bank accounts, a money market account from a US bank is insured by the Federal Deposit Insurance Corporation (FDIC) for up to $100,000 US Dollars. While you may find what looks like a better deal on an account offered by a big corporation, remember that the FDIC does not insure their accounts. If the company files bankruptcy, you lose your money.
While a money market account makes a decent low risk investment, keep in mind that because it is an investment, there are certain restrictions. Your money will not be as liquid as it is in a regular savings account, and it usually requires a minimum deposit, as well as a minimum balance. While you can make withdrawals from the account, there is a limit to how many you can make in a month’s time. You cannot withdraw an amount, or combined total of amounts, that causes your balance to go below the minimum without penalties.