Large companies, banks, and various government agencies sometimes issue money market securities as a means of covering short-term debt. Investors typically buy these to include in their portfolios in addition to long-term investments such as stocks and bonds. Although they are issued by different borrowers, money market securities share certain characteristics, including safety and liquidity, which is part of what makes them appealing to investors. The significant financial return they offer also adds to their appeal.
Safety
Money market securities are considered to be very safe because they are issued by companies that must have very high credit ratings. The U.S. Securities and Exchange Commission (SEC) requires that a minimum of 95 percent of the securities in a money market’s fund must have earned the highest possible rating from at least two major institutions that provide credit ratings. It is extremely rare for a money market fund to lose value. However, investors need to remember that returns are not guaranteed and a loss is possible, even if highly unlikely. Also, an individual money market security may lose value where a fund made up of multiple securities may gain.
Liquidity
One aspect of money market securities that many investors find very important is the high degree of liquidity they have. These securities typically have a very short lifespan and mature in as little as a day, though a longer period, usually about three months, is more typical. In fact, the U.S. SEC says that money market securities must have an average maturity of 90 days. All money market securities mature in under a year, adding to their liquidity and providing investors with a speedy return on their investments.
Types
Most money market securities are items that tend to have a face value of at least $100,000, and often much more. These are most often certificates of deposit, U.S. Treasury instruments, repurchase agreements and federal bank loans. This type of paper also includes municipal securities, money market futures and commercial paper. Money market funds typically use a mix of different securities to make up the fund, but in some cases a fund may specialize in only one type.
Discounts
Money market securities all share the common characteristic of being offered at a discount. This means that they are sold for an amount that is less than the face value of the item, providing additional incentive for buyers. However, when the item matures, it does so at its full face value, providing the investor with a significant benefit on his original investment, something that is highly appealing due to the short-term nature of these securities.
