There is some confusion surrounding the differences between a money market account and money market funds. People are more commonly aware of the money market fund – which is a type of mutual fund that invests in low-risk securities like U.S Treasury bonds. The money invested is not insured by the government.
On the other hand, the money market deposit account is an interest-bearing bank account investment. It's federally insured provided you obtain the account through an FDIC institution. This gives you insurance up to $100,000 for a standard money market account and up to $250,000 if the money is in a retirement account.
Money Market deposit accounts share some characteristics with money market funds, primarily in that they earn a higher interest rate than the average savings or checking account, but while money market funds involve a small level of risk to the investor – a money market deposit account puts the risk on the bank or broker and insures the investors deposit for a risk-free savings vehicle.
Money market accounts are usually managed by a bank or broker, and are often used by investors who are looking for a temporary, insured account to hold their money. Investors looking into various investments may deposit the money into a money market account until they make a decision regarding what to do with their money for example, and when investors receive money from the sale of an investment – they often turn to a money market account to hold the money temporarily while deciding what to do with it to maximize their returns.
Many money market accounts provide many of the same services as a basic checking account, although you may be limited to the number of transactions you can make during a specific time period. Money market accounts earn more interest than most checking or savings account options, and are considered safe and highly liquid investments. They do have lower interest rates than most other investments.
There are also some similarities between a money market account and a certificate of deposit – but for the temporary saving of money that also provides easy access to the funds, the money market account is superior. The certificate of deposit is a safe investment that earns interest as well, but you have to commit to leaving your money in the account for a certain length of time – ranging from a few months to several years. While it is possible to take the money out of a certificate of deposit sooner, you will be faced with a penalty for early withdrawal.
Alternatively, you can access your cash in a money market account whenever you want with the checks the bank gives you, as well as an ATM card in some cases. Deposits you make to the account are immediately available for withdrawal as well, which makes it possible for you to add funds to the account after opening. When you use a certificate of deposit, you open the account with a certain amount of money, and then you are bound for the specific time period you selected upon opening the account – which means if you find the perfect investment for your cash before it matures, you have to either pay a penalty to withdraw the money early, or chance missing out on the investment opportunity by waiting until your certificate of deposit matures.
You don't have to be an avid investor to benefit from a money market deposit account. Many people opt to use money market accounts as their primary checking account in order to benefit from the higher interest the account earns.