In the money market, a market account will pay interest rates just like a savings account in a bank. These rates vary from week to week. As an investor, you need to understand this variation and know how to find the best money market rates. The best way to do this is to understand what a money market account is, and how the rates are determined.
What is a money market? It is a section of the financial markets where assets are available for short term borrowing and lending. They are usually set to mature within a year or less. The assets, or securities, can be commercial paper, treasury bills, CD’s and others, depending on the specific money market. Participants in a money market wish to borrow or lend funds. The difference between a money market and the capital markets is the duration of investment – in money markets, the duration is much shorter.
When assets go into the money market, they are called funds. A fund will make money from the interest or yield that is obtained from lending. This interest will be paid out to those who lent to the fund as profits. The interest rates thus become significant in the success of any money market – those that are reputed to have the best money market rates will attract more investors and have more money to lend.
Why Do Rates Change?
The rates in a money market will change because of the shorter investment period. Securities are always maturing and being paid out as new ones are added. This is what will cause the interest rates to change, usually from week to week.
As an investor, you need to know what securities attract the best money market rates – some will be higher than others.
The changes in interest rate will affect you whether you are borrowing or lending.
Say you are a borrower. You want to borrow at a rate that is not too expensive to pay. You use your money market account to borrow funds from a lender, who at the same time is in the money market because of the attractive interest rates that are offered. That calls for a careful balance so that lenders are happy to contribute their excess funds to the money market and borrowers are also keen to participate because they don’t pay too much in interest.
As a lender, rates are a must watch. Very high interest rates show a significant amount of risk – it’s much more probable that at elevated rates, borrowers could default and you would lose your money.
Investors who are risk averse tend to go for government backed securities or instruments on the money markets – they come with less risk but pay less interest as well.
Investors who are willing to take more risk will go for more varied securities. Despite all this, everyone who is participating in the money market is out to get themselves the best money market rates that they can, whether they are lending or borrowing.
How do you find the best money market rates?
By going to the best money markets. The best money markets are defined as those that have successfully invested instruments and securities for over 35 years. They will tend to attract the most lucrative investors. Businesses, governments and individuals who have an excess of cash will head towards them because they are reputable and certain to get the investment yield that they promise. At the same time, they only lend to reputable businesses. This means that they have a constant flow of securities – as some are maturing there are other ready securities waiting to be invested. This keeps them highly liquid and their interest rates are constant.
Any money market will promise to return at least the principal amount of investment, plus some yield depending on how interest rates rise and fall.
To find the best money market rates, head towards the best money markets. They are usually listed in various places, but if you are not sure of yourself, seek a professional investor who will be able to advise you.