Money market accounts versus certificates of deposit – A comparison

Both money market accounts and certificates of deposits are means to invest cash while making investments or purchases along the way.

Certificates of deposits are instruments of debt that are given out by banks and even other financial institutions. When a certificate of deposit is issued, a time frame is determined before which the money cannot be removed. And the bank will pay the depositor some amount of interest for keeping the money with them. The time frame for which the investment is locked in can range from anywhere between a few weeks to even a couple of years. The interest rate will be greater if the time frame for which the investment is made is greater.

There are a number of benefits to getting a certificate of deposit versus a money market account. The thing is that you can calculate the interest that you would get from the certificate before it matures. These certificates of deposit are insured up to a $100000 by the FDIC. But the flip side is that the depositor loses access to his or her funds while the money is locked up with the bank. And if he or she wants quick access to the money, a fine would have to be paid to gain access to the same and the interest accrued would be lost.

A money market account is a more fluid account compared to a certificate of deposit. Here, the depositor will invest a certain amount of money with a financial institution and will be promised a minimum interest rate. Most of the time that interest rate will even be zero. But the benefit is that if the investment does well, the interest rate accrued could be even twice that of the interest rate gained from a certificate of deposit.

The mechanism of the money market account is as follows. The investor will deposit the money and an agent with the financial institution will take a call as to where to invest it. It could be in government bonds, certificates of deposits, savings bonds, and other safe and conservative investment options. Based on the returns that are accrued, the financial institution will pay out a certain interest amount to the depositor. But there will always be some amount of risk associated with such an account. The interest amount that you get will totally depend on how your investment fared. And this totally depends on the judgment of the investment manager who invested your cash in the certain financial instrument.

The benefit of having a money market account is that the cash is readily accessible to the investor through a checking account. But there are certain limitations to a money market account. For example, there may be a limit on the number of checks that can be drawn out per month. And also the interest rate will depend on the amount of cash deposited rather than the duration for which it is deposited. There will in most cases be a minimum deposit over which you will be entitled to a money market account. Hence the money market account is disproportionately biased towards richer investors.