What is a Money Market Certificate?

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Money market certificates are essentially a type of savings product in which a bank or lending institution invests your money in a variety of investments. The interest you receive on the account, or its yield, will be proportional to the amount of money you invested in the money market certificate as well as the performance of the securities your money has been invested in.

Money Market Certificates

  • Money market certificates (MMCs) are similar to certificates of deposit (CDs). With a CD, you loan a bank or other financial institution a sum of money, and the financial institution in return rewards you with a rate of interest. Normally, you cannot withdraw the money without penalty until the CD matures. With MMCs, you loan the money to the financial institution, which invests it in a variety of CDs, government Treasury bills, bonds and so on. The money earned on these investments is paid back to you. Thus, it is essentially a type of mutual fund. You are normally allowed to withdraw money from an MMC account using a checkbook.

Investing in Money Market Certificates

  • When investing in money market certificates, you should consider the time to maturity. MMCs, as they have a maturity date, are not as liquid as other financial instruments. Ask what would happen if you were to withdraw all your money early. Opening a money market account can be done at most banks and financial institutions.

Types of Money Market Certificates

  • When you take out a money market certificate, the issuing financial institution will try its best to kept the net asset value (NAV) at $1 per share. Thus, if you invested $100, the bank will try to keep your account at least at that value. It is possible to lose money in an MMC, but this is rare. The MMC's performance and risk will depend on what the financial institution invests your money in. Some banks offer locked-in rates for an initial period and pay dividends on investments. Some MMCs have higher yields in exchange for higher risks due to less reliable investments.

Disadvantages of Money Market Certificates

  • One disadvantage of a money market certificate is a possible limit on the number of checks you can write on it each month. For this reason, a conventional savings account may provide a more liquid option for your savings. Furthermore, in contrast to CDs, the level of interest is proportional to the amount of money deposited and not the maturity date of the certificate. Therefore, the more money invested in a money market certificate, the more you will receive in interest. MMCs are geared toward investors with higher levels of wealth.

References

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