Are Money Market Accounts Guaranteed?
Investors typically look for either a steady investment option or a riskier option that has the possibility of higher returns. For those who want safer options, banks offer money market accounts that diversify investments over many different securities. Because of the insurance involved, these money market accounts are considerably less risky than other options.
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Definition
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Money market accounts are bank accounts that investors can place money in to grow it at a steady rate. These are essentially deposit accounts, but they have fixed interest rates that allow the balance to grow at a higher rate than other options, such as savings accounts. The bank typically uses the money in the account for specific investments that allow it to offer these higher rates. Money market accounts are generally invested in short-term, fixed-income investments such as U.S. Treasury bonds.
Purpose
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The purpose of the money market account is to minimize risk while still giving investors a chance to profit. Investors who are nervous about dabbling in the stock market and do feel comfortable investing funds in stocks may prefer these accounts, which promise a steady and reliable interest rate without the hassle of stock market investment.
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Considerations
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The stock market may be risky, but it does offer greater rewards than any bank account can. The interest rate of money market accounts does not match historical returns from stock market investment, and investors may find it is difficult to make a profit in times of increasing inflation rates. Money market accounts are rarely a sole option for serious investors.
Insurance
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One primary benefit of money market accounts is their insurance, which guarantees the funds. Because the investment is a bank account, it falls under the FDIC insurance that protects account holders in American banks. If the bank fails, the account is insured for up to $100,000. Sometimes the government extends the protection of money market accounts: One extension increased the insurance to $250,000 until 2013.
Warning
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Money market mutual funds are not the same as money market accounts. They are portfolio choices for investing in a wide number of stocks managed by a broker, and as such do not have any FDIC insurance.
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