Learn the definition of money market account and how it works to produce the desired results for the bank and its customers.
What is a money market account?
This type of account, also known as money market savings account or money market deposit account, is a type of account that usually pays higher interest than a basic savings account. As the rate of interest is higher, the required minimum balance is often considerably higher than regular savings account. See below how it works.
How it works
These accounts function similar to traditional savings account. The account holder deposits money which is invested in the market. The interest is given to the client when profit is earned from his money that is invested in the market. As the customer deposits larger amount, the rate of interest is higher too. A feature of the MMA is similar to checking account i.e. the account holder has limited check writing ability. This type of account is insured by the Federal Deposit Insurance Corporation (FDIC).
They are widely available today as they are available by many banks and financial institutions. It restricts the number of withdrawal by the customer over a given period of time. Thus, it can be said that this bank account type is more liquid than bonds but less liquid than a checking account. The client is allowed to write checks on the account balance but is limited to only 6 checks per month. The interest earned on a MMA is taxable similar to savings and checking accounts. The account holders do not have to buy shares in this type of account.
The banks offering such accounts take a low risk approach when making investments. They choose safer investment options by investing in commercial papers, government securities and certificates of deposits. There is a type of mutual fund called the money market mutual fund where the investors can purchase shares.