How Safe are High Yield Money Market Accounts?
When people desire to create wealth out of money they possess, but do not have the time and the talent to invest it profitably, they go to a financial coach for advice. The advice the coach gives them would likely include putting funds in so-called high yield money market accounts.
High yield? Money market accounts? They are nice to hear, but these terms may sound Greek to the ordinary citizens. To begin with, what is the money market anyway?
Imagine the money market as a place where banks, investment houses, money dealers, and other similar institutions come together to borrow or lend. The concept is like your neighborhood market where vendors and town residents meet to buy or sell household goods and services.
In the money market you find on one hand borrowers who have short-term (less than a year) financial opportunities to grab but are short in funds, and on the other, lenders who have excess cash that they want to grow.
Not all institutions that wish to borrow can participate in the market, but only those who are certified to have strong credit rating. This is very important because borrowings are often unsecured; they are not backed up by collaterals but only by the borrower’s good name.
If misfortune befalls a borrower, the lender also suffers. The market has rules and safeguards to protect participants from such misfortunes, but cannot guarantee that they will never happen.
Generally accepted legal documents are used as evidence of money market transactions. They are called financial instruments, or simply “paper”. They include: CP (commercial paper), T-bills(Treasury bills), CDs (certificates of deposit), bankers’ acceptances. These are the goods that are bought and sold in this market.
Money suppliers (lenders) make a profit from the price they receive for the use their money. To give a highly simplified example: if a lender receives 1.2 million dollars for every million that he lends, he earns a gross “yield” of 20%. Greater demand for money in the market means higher yield.
Banks love to participate in the money market as lenders because there are more opportunities than misfortunes. To help them raise funds to invest in the money market, they offer to the public a special type of service called a money market account.
Banks market the service as high yield money market accounts in order to catch the public’s attention. This service is processed like other deposit accounts, but there are limits on the number and manner of withdrawals allowed.
In contrast with ordinary savings accounts, high yield is possible in money market accounts because they are invested in a riskier environment. Banks share their earning s from the money market with clients who place their funds in high yield money market accounts.
So how safe are high yield money market accounts? They are as safe as the degree of integrity and financial acumen possessed by the banks that offer the service. from kal-kalan