money market

Money Market

The money market is a segment of the financial system where short-term borrowing and lending takes place, generally involving loans or investments that mature in one year or less. Governments, banks, and large corporations typically use the money market to manage their short-term cash needs, either by borrowing funds quickly or by parking excess cash somewhere safe and accessible.

For everyday consumers, the money market is most visible through money market accounts and money market funds. A money market account is a type of deposit account offered by banks and credit unions that generally pays higher interest than a standard savings account, while still keeping your funds relatively accessible. A money market fund, on the other hand, is a type of investment offered by brokerages that pools money from many investors and puts it into short-term, low-risk securities such as Treasury bills and certificates of deposit.

Why it matters

The money market matters to consumers because it offers a middle ground between a basic savings account and longer-term investments. Money market accounts and funds typically offer better returns than regular savings accounts while maintaining a high level of safety and liquidity. In most cases, your money remains easy to access, which makes these options appealing for emergency funds or short-term savings goals.

It is worth noting that money market accounts at banks are generally insured by the FDIC up to applicable limits, while money market funds are investment products and are not FDIC-insured. Understanding this distinction helps you choose the right option for your needs and risk tolerance.

Example

Suppose you have $10,000 sitting in a checking account earning little to no interest, and you do not plan to use it for about six months. You could move it into a money market account at your bank, which typically offers a higher annual percentage yield than a standard savings account. Your money remains accessible if you need it unexpectedly, and it earns more interest in the meantime. At the end of six months, you withdraw the funds plus the interest earned, with no penalty.

Related terms

• Money market account
• Certificate of deposit (CD)
• Treasury bill
• Liquidity
• Annual percentage yield (APY)