Characteristics of Money Market Instruments

Money market instruments are short-term, relatively secure investments used by investors looking for places to temporarily keep their funds and organizations looking to raise money on a short term basis. You can invest in them directly or through a money market mutual fund or money market account at many banks.

Markets that let companies and government agencies raise funds on a short-term basis, meaning less than one year, are called money markets. Markets where they raise money on a longer term basis are called capital markets.

Financial instruments available to trade in money markets include U.S. Treasury bills, which are short-term federal government debt; commercial paper, which is short-term corporate debt; and banker's acceptances, which is short-term commercial debt guaranteed by a bank. Short-term bank certificates of deposit also fit into this category.

For organizations looking to raise money, they're a good, reliable way to fund day-to-day operations or short-term capital needs. For investors, including businesses and individuals, they can be a good, fairly low-risk way to get some return on cash for a relatively short period of time. Money market securities typically return less to investors than long-term investments in stocks or bonds, so they're usually not seen as ways to build wealth over a long period of time.

For investors looking to put their money into money market instruments, there are a few options. First, they can invest directly in some of the instruments themselves. Plenty of banks have short term CD options available for depositors, and investors can buy Treasury bills direct from the U.S. Treasury or through a bank or broker.

Investors can also put their money into money market accounts available from many banks. They work similarly to savings accounts, in that they limit the number of withdrawals per month and pay a relatively high interest rate, although some have features of checking accounts as well, such as debit cards and at least a limited ability to write checks. Banks typically invest the money in such accounts in relatively safe investments in the money markets, and money market accounts in the United States are still generally insured by the Federal Deposit Insurance Corporation like other bank accounts.

Brokerages also often offer the opportunity to invest in money market funds, which are mutual funds that invest in the money markets. They often advertise to investors who want to put their funds somewhere safe but also liquid, and there's often no fee for entering and exiting a position in these funds. Their returns often aren't nearly as high as investing in the stock market, but they're seen as safe investments with little risk of losing money, even though they're not FDIC-insured like money market bank accounts.