Money Market vs Certificate of Deposits: Which is Better?

money market vs Certificate of Deposits
money market vs Certificate of Deposits

This article on money market vs Certificate of Deposits, will enlighten you on all you need to know. We will talk about definitions, comparisons, reviews and alot more relevant information. Information you will get here will enrich your knowledge bank enough to decide what’s best for you.

Money market(MM) and certificates of deposit(CD) are types of federally insured savings accounts that earn interest. They vary basically by interest rates and accountability to your funds.

MMs and CDs are both bank products offering low yields with maximum peace of mind. However, choosing between them ultimately depends on the specific objective you have for the cash and your need for liquidity. Understanding the differences between the two is the key to determining which is the most appropriate medium to serve your needs.

They have unique advantages and disadvantages that are important to understand—including differences in terms, yields, pricing, conditions, and restrictions. Therefore, Deciding between the two will come down to your personal circumstances, resources, and preferences. In subsequent paragraphs, we will tell you all the things you need to know about the money market vs Certificate of Deposits.

What is money market (MM)?

Money market are special FDIC-insured savings products offered by banks. This account pays a higher interest rate than a regular savings account, but with more strict limits on withdrawals. The interest rates on MMA’s are variable, which means they rise and fall with the interest rate market.

An economist will define money market as a section of the financial market. Where financial instruments with high liquidity and short-term maturities are traded. Its basically a component of the financial market. For buying and selling of securities of short-term maturities, of one year or less, such as treasury bills.

How does the money market works?

The money market consists of financial institutions and dealers in money or credit who wish to either borrow or lend. Participants borrow and lend for short periods, typically up to twelve months

The longer you lock away your money, the more likely the better opportunities for your money to rise. And you can withdraw your funds at any time with no penalties (as long as you aren’t frequently withdrawing). Money market trades in short-term financial instruments commonly called “paper”. Money market is considered a safe place to invest due to the high liquidity of securities.

What is Certificate of deposit (CD)?

CDs are best described as timed deposits that credit a fixed rate of interest tied to the maturity date. A certificate of deposit (CD) is a product offered by banks and credit unions that provides an interest rate. It involves exchange for the customer agreeing to leave a huge sum deposit untouched for a predetermined period of time.

CDs are a safer and more conservative investment than stocks and bonds, offering lower opportunity for growth, but with a non-volatile, guaranteed rate of return.

Top-paying certificates of deposit pay higher interest rates than the best savings and money market accounts in exchange for leaving the funds on deposit for a fixed period of time.

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How does the certificate of deposit works?

Opening a CD’s is more like any other regular account you open with a bank. The basic deference is the fact that you agree to some strict conditions. Although you lock into a term of duration when you open a CD, there are options for exiting early should you encounter an emergency or change of plans.

Just like regular accounts in a bank, this also comes with monthly or quarterly statement periods, paper or electronic statements, and usually monthly or quarterly interest payments. Interests accumulated are paid into your CD balance.

When running a certificate of deposit account there are certain terms you have to be conversant with, they are:

The principal

With the exception of some specialty CDs, this is the amount you agree to deposit when you open the CD.

The interest rate

You have to be aware that the interest in this type of account is fixed and cannot be change by the bank. And therefore your earnings cannot be reduced by the bank. As you sign up with a principal, they provide a clear and predictable return over a specific time period. On the other hand, a fixed return may hurt you if rates later rise substantially and you’ve lost your opportunity to take advantage of higher-paying CDs.

The term

This refers to the length of time you agree to leave your funds deposited to avoid any penalty. The term ends on the “maturity date,” when your CD has fully matured and you can withdraw your funds penalty-free.

The institution

The bank or credit union where you open your CD will determine aspects of the agreement. This involves agreed penalties on early withdrawals and whether your CD will be automatically reinvested.

How Are CD Rates Determined?

Its usually the Federal Reserve Board’s rate-setting actions, that determine what savers can earn on their deposits. Although this largely depends on how much deposited, and how long it stays with the institution.

In December 2008, the Fed reduced funds rate to the lowest level possible of essentially zero. As a stimulus to lift the U.S. economy out of the Great Recession. Beginning in December 2015, however, the Fed began to gradually increase funds rate. In light of metrics showing growth and strength in the United States.

In Summary

Certificates of deposit are a special type of savings instrument. They provide a way to put money away for a specific savings goal.  But money market allow you to make additional deposits anytime, also allows up to six withdrawals per month.

When considering opening a CD or how long a term to choose, pay attention to the Fed’s rate-setting movements and plans. Opening a long-term CD right before a Fed rate hike can hurt your future earnings, while expectations of decreasing rates can signal a good time to lock in a long-term rate.

I believe we have done justice to your basic queries on the money market vs Certificate of Deposits. You can still do further researches on the subject, it’s recommended you have a piece of strong background knowledge on the subject before opening an account.

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