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How Does a Money Market Account Work

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How Does a Money Market Account Work

The novice investor is faced with a flurry of investment options in the current highly saturated financial market.

Making an informed decision when it comes to finances is important. Deciding to save or invest is a proactive way of safe-guarding your financial future. Finding the best ways of doing this presents individuals with a plethora of options, which may be confusing without the necessary information.

Investment requires savvy planning and thorough consideration of various options. By investing, you are able to gain more money on invested funds. There are various ways of investing, such as on the stock market. But when this option is too volatile for individuals, the money market is often the next bet.

The Money Market can be considered to be a safe haven for short-term financial needs. Low-risk in nature, these funds generate returns through interest income derived from various money market instruments. It’s also a useful alternative for when a bear market comes along (a condition in which the prices of securities are falling and widespread pessimism causes the negative sentiment to be self-sustaining.

Money markets have no need for a central trading floor (such as a stock exchange) or brokers. It is a dealer market. Transactions are conducted directly within various firms’ accounts. Securities traded on the money market can be issued to individual investors by the government, large corporations or other financial institutions as a highly secure form of a liquid asset.

Started in South Africa in 1995, money market funds are a relatively new development. The Money Market offers more benefits than traditional bank deposits.

Investing on the Money Market:
Individual investors have access through money market mutual funds or a money market bank account. These funds work by pooling the funds of many investors and using them to purchase money market securities on their behalf. Working similarly to a savings account, the best way to maximise returns on your money market account is to make regular deposits.

Some banks offer packages whereby the bank chooses the best investment for your money from a list of high-performing funds. The bank pays you interest on the amount deposited.

Interest is generally compounded and paid monthly. This results in interest being paid out being on your initial deposit and also on the accumulated interest the bank regularly pays out.

As a measure for maintaining the security level the market is known for, many banks only allow you a limited number of withdrawals per month.

One of the most reliable and risk free ways to watch your money grow, Money Markets have more Benefits, which you could consider when making a decision about investing:

  • Relative certainty is provided.
  • Stable returns are provided.
  • There is lower risk.
  • They offer higher yields than deposit accounts.
  • The fund will always retain an element of liquidity (which means you’ll always have quick access to your funds.)
  • Funds are regulated and closely monitored by the Financial Services Board.
  • Funds are priced daily and interest accrues daily.
  • There are no charges to deposit funds or to redeem funds.

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