There are two basic kinds of money market accounts: money market savings or checking accounts, and money market funds. It is important to know the differences between the two because they have different deposit and withdrawal requirements and are treated differently by the federal government. Money market accounts are insured by the federal government; money market funds are not.
Money Market Accounts
Money market accounts are generally available through your bank or credit union and allow you to withdraw your money quickly and easily with a check or through a wire transfer or via the ATM. Money market accounts can be used as either savings or interest-bearing checking accounts; often—but not always--they have greater yields than regular saving accounts. Because banks and credit unions offer money market accounts, these accounts are insured by either the Federal Deposit Insurance Corporation (FDIC for banks) or the National Credit Union Share Insurance Fund (NCUSIF) administered by the NCUA (National Credit Union Association for Federally chartered credit unions).
Money market accounts usually require a minimum deposit amount as well as a minimum monthly balance. You could pay a penalty if your balance falls below the minimum amount. You can also lose money on your money market account by withdrawing more often than the stated monthly allowance, and also by losing interest on the money withdrawn. You pay for the ease of withdrawal by receiving a lower interest rate annual yield.
Money Market Funds
Money Market funds are offered and administered by brokerage houses and mutual fund companies. When you open a money market fund account, your money is invested for you in highly liquid (easy to withdraw) and very safe securities, such as CDs (certificates of deposit), government-issued securities, and short-term corporate obligations (called “commercial paper”). With a money market fund, the money you deposit buys a certain number of “shares," depending on the price of the share at the time of purchase.
Like money market accounts, you have quick and easy access to your funds. Unlike money market accounts, you can receive a higher yield on your money. But because your yield is higher, and the value of your funds is based on the prices of the securities bought, money market funds are not insured by the federal government.
The value of your money market fund changes frequently. The price of each share depends on the value of the purchased securities at the time in question. It is difficult to determine the best time to liquidate your shares. When you withdraw your funds, the share price may be higher than it was when you purchased your shares, so you lose money by paying more per share at withdrawal.
Money Market Interest-bearing Accounts
Money market accounts and money market funds are safe places to deposit your money, and both allow you to make some interest on your money, while at the same time giving you easy access. The amount of money you will pay or otherwise lose upon withdrawal differs with the type of account you have.