Lisa Goetz is a Finance content writer for Investopedia since 2016
More than most investment vehicles, but they still carry risk
Investments come in all different sizes with all sorts of risks. The kind of risk involved with investing has a lot to do with how much capital you put in, your investment horizon, and, more importantly, the kind of investment you choose.
Some investment vehicles are safer than others. Stocks are inherently volatile, hedge funds can be risky, and options contracts can come with big losses. Other assets like bonds provide a relatively lower risk versus less conservative assets such as options, stocks, or alternative assets.
Meanwhile, investment vehicles like money market accounts, which pay a higher return than a traditional savings account, also offer lower risk. Just don’t confuse these accounts with money market funds, which is something different entirely. Below, we’ll consider the difference between these two assets and how safe your money is if you invest in them.
- Both money market accounts and money market funds are relatively safe.
- MMAs are insured up to $250,000 per depositor by the FDIC.
- Banks use money from MMAs to invest in stable, short-term, low-risk securities that are very liquid.
- Money market funds invest in relatively safe vehicles that mature in a short period of time, usually within 13 months.
Money Market Accounts
Money market accounts (MMAs) are deposit accounts that can be open at banks or other financial institutions like credit unions. They act like a checking-savings account hybrid, offering both the flexibility of a checking account with the features of a savings account.
They come with checking account features, meaning you can write checks, make transfers between accounts, and conduct debit card transactions—up to a certain limit. Federal guidelines limit them to six per month, after which you’re charged a service fee. These accounts also offer higher interest rates than standard checking or savings accounts. This makes them a great option for people who want to save for a rainy day, vacation, or other major expenses.
Most financial institutions require deposit minimums for most money market accounts. For instance, Bank A may require you to open an account with a minimum balance of $25,000. You may also be required to maintain that balance each month. If you dip below that amount, you will generally be charged a monthly fee.
Are Money Market Accounts Safe?
Money market accounts are generally a safe investment. For one thing, they are insured by the Federal Deposit Insurance Corporation (FDIC). The independent agency insures combined deposits up to $250,000 per depositor for member firms. If the bank or institution fails, your combined investments per member firm will be covered up to $250,000.
Another reason why these accounts are relatively safe is that they come with very low risk. That’s because banks use the money from these accounts to invest in stable, short-term securities that come with low risk and are highly liquid including certificates of deposit (CDs), government securities, and commercial paper. Once these investments mature, the bank splits the return with you, which is why you end up getting a higher rate.