Investing Advice

Money Market Funds

So where do you park your money while you are waiting for the market to turn around? Investments such as bank certificates of deposit (CDs) which are insured by the federal government, sound pretty good. You agree to tie up your money for anywhere from 30 days to 5 years to earn a guaranteed rate of interest. But when an investment opportunity presents itself, you want your money available right now, without paying a penalty for early withdrawal. This is why CDs may not be right for you.

A money market ACCOUNT is a fancy name for a savings account at your local bank, usually with a $500 minimum balance. Like standard passbook savings accounts, you can put more money in or take money out at anytime. But the shameful interest that the bank pays you won't even keep up with inflation. As this is being written, big banks such as Bank of America are paying less than 1%. We have been such suckers!

A money market FUND, sometimes called a cash management account or asset management account, is provided automatically by your stock broker for your money on the sidelines. Pioneered by Merrill Lynch in the 1980’s, current yields are less than 2 percent. During the year 2000, many paid 6 to 7%.

Money market funds are convenient for both investing and ready access to your cash, many offering both check writing and debit cards that you can use at any store or ATM machine. You may even decide to consolidate your bank accounts into a master money fund, giving you a single statement showing your checking account and credit card activity.

Money market funds with a major brokerage or mutual fund are extremely safe. They invest your money if T-Bills, Fannie-Maes, Ginnie-Maes, and high-grade corporate bonds. If you don't know what all these are, that's okay, all are safe investments. Money funds offered by respected companies such as Fidelity or Vanguard are extremely safe.

Of 1,200 money market funds currently available, 360 invest only in tax-exempt securities, ideal for a standard taxable account.
 

The only money market funds that you should avoid are risky ones that pay a very high rate because they are gambling with "derivatives" such as CMO’s (collateralized mortgage obligations), dual-index, inverse, and leveraged floaters. The explanation of these is beyond the scope of this book, but I’m telling you about them to give you a warning to stay away from anything that just seems too good. They can “go negative” and quickly lose some of your money.

Other Stock Market Basics Topics:

  1. Stock Market Basics
  2. Why invest in the stock market?
  3. Why Sell Stock?
  4. How are shares bought and sold on the NASDAQ?
  5. How stocks are traded on the New York Stock Exchange
  6. What are ECNs?
  7. Supply and Demand
  8. American Stock Exchanges
  9. International Stock Exchange
  10. What fuels demand for a stock?
  11. More to Know About Stock Trading
  12. Limit Orders
  13. Market Capitalization
  14. Preferred Stock
  15. How to Buy Stock?
  16. How much money do you need to open a brokerage account?
  17. Money Market Funds
  18. Margin Loans and Investment
  19. Corporation Executive Pay
  20. How much money do you need to open a brokerage account?

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