How to invest in Money Markets:

The easiest way for you to gain access to the money market is with a money market mutual funds, or sometimes through money market bank account. These accounts and funds pool together the assets of thousands of investors in order to buy the money market securities on their behalf. However, some money market instruments, like treasury bills, may be purchased directly. Failing that, they can be acquired through other large financial institutions with direct access to these markets.

Money market mutual funds are a type of mutual fund that invests in short-term (less than a year) debt securities of agencies of the U.S. Government, banks and corporations and U.S. Treasury Bills. They are fixed at $1 per share and only the yield fluctuates. If you don't know what a mutual fund is go to our mutual fund section. Banks prefer that you never hear about the money market funds available to you because these funds offer advantages that savings accounts, checking accounts and CD's can't beat:

High Liquidity - Money market funds are very liquid, meaning you can take money out of them on short notice. There is no penalty for taking money out of your money market fund, unlike Certificates of Deposit (CD's) that impose large fees for withdrawing your money. You can also write checks from your money market account (typically three a month).

Low Risk - Money market funds are not FDIC insured, but they are still very secure because they are holding very safe investments like t-bills. Government debt securities are considered very safe because the government has the ability to raise taxes to meet its obligations. It is virtually impossible to lose your principle in money market funds. To top it off, most mutual fund companies carry some sort of insurance to cover your assets.

Competitive Yields - Your checking and savings accounts will have a tough time beating the yield of a money market fund. Money market funds return an average of 4 to 6 percent a year, which rivals the return of CD's. The interest is calculated daily, but only paid out at the end of the month unless you sell the fund, then it is paid at that time.

Widely Used - Trillions of dollars of investors' money is in money market funds. If you sell a stock or a mutual fund, your broker or fund company will typically move your proceeds into a money market account so you can collect interest. Also, when you open an account with most brokerage firms or fund companies, your money is typically put into a money market account until you are ready to purchase bonds or equities.

Money market funds are clearly a smart place to hold your money. If you are between investments, saving for a house, saving for a vehicle purchase, or just looking for a safe place to put money, a money market fund is a great alternative to holding large amounts of money at the bank.

Here is a recap of money market instrument and it's features:

• The money market specializes in debt securities that mature in less than one year.
• Money market securities are very liquid, and considered very safe. As a result, they offer a lower return than other securities.
• The easiest way for individuals to gain access to the money market is through a money market mutual fund.
• T-bills are short-term government securities that mature in one year or less from their issue date and are considered to be one of the safest investments, and so don't give a great return.
• A certificate of deposit (CD) is a time deposit with a bank. They are safe, but the returns aren't great, and your money is tied up for the length of the CD.
• APY takes into account compound interest, APR does not.
• Commercial paper is an unsecured, short-term loan issued by a corporation. Returns are higher than T-bills because of the higher default risk.
• Bankers' acceptances (BA) are negotiable time draft for financing transactions in goods. They are used frequently in international trade and generally only available to individuals through money market funds.
• Eurodollars are U.S. dollar-denominated deposit at banks outside of the United States. The only way for you to invest in this market is indirectly through a money market fund because Eurodollar deposits are very large.
• Repurchase agreements (repos) are a form of overnight borrowing backed by government securities.

Related Links
Mutual Funds - An excellent introduction to money market mutual funds.

Instruments of the Money Market - This is an extensive guide to money market securities from the Federal Reserve Bank of Richmond.