What Is a Money Market Investment?

A money market investment is an account held by a bank or other financial institution that keeps its cash in short term debt obligations. This is done to insure maximum safety for the money market investment principal while providing a modest return. The short term debt obligations held in money market investments are usually from highly rated companies and government agencies.

Potential

Money market investments have the potential to make, on average, two to five percent per year. This modest rate of return is the result of their conservative investment strategy in short term debt obligations. Money market investments put their money in treasury bills, certificates of deposit and commercial paper. Money market investments are considered open ended investments, meaning investors add and withdraw funds from money market fund accounts at any time without penalty.

Benefits

One of the benefits of a money market investments is the low risk to principle. It is possible to effectively lose money in a money market investment, though it is very unlikely. If the interest rate were to decline below the rate of inflation, the money market investment loses buying power. Money market investments are usually not FDIC insured. You might not get your money back if the company holding your money market investment goes bankrupt.

Significance

Money market investments are among the most significant in finance. Since they act as holding places for cash waiting to be invested, they are some of the most widely owned securities. Proceeds from sales of stocks, bonds and mutual funds are often directed to money market investments. Interest and dividends from other investments are often transferred automatically into money market investments.

Function

Money market investments require higher initial deposits than bank savings accounts. This is usually between $1000 to $5000 and is the minimum balance that must be maintained. Most money market investments keep a stable one dollar per share price. When interest is paid, it is done with additional shares at the one dollar per share price. Most money market investments provide check writing services with the account.

Considerations

Investors must take into consideration that money market investments are not all the same. Different funds invest in different securities and pay different interest rates. It is important to compare the performance of money market investments. While past performance is not a guarantee of future return, it will give investors an indication of the potential of a money market investment. Keep in mind that interest rates often change without notice.