Understanding a High Yield Money Market

High Yield Money Market

High Yield Money Market can also be referred to as a Money Market Demand Account or a Money Market Deposit Account – MMDA.

To understand MMDA better, let’s talk a bit about what a money market is.

The money market is a place where huge companies and governments come to manage their cash requirements. It is the section of the financial markets for possessions involved in temporary borrowing and loaning. It involves trading stocks, treasury bills, bonds, metals, agricultural goods, commercial paper among other products at low costs. The money market is very important to us. Without it borrowers would not be able to find lenders.

It works on a short term basis – you are able to get returns rather fast. In this sense, it is different from the capital market, which is more medium and long term.

The details, like the rate of interest and duration of investment, will vary from country to country. Despite this, the basic structure remains the same – it enables those with excess short term funds to lend to those who need short term loans.

To get in, you would need a middle man. This is a person who is conversant with the money market, and is the one you would explain your needs to regarding a high yield money market. He would then go out and look for a person or institution that is willing to borrow for the short term at a high interest rate – the whole point of the MMDA.

Governments take a keen interest in money market, because they borrow as well as lend. They want to be able to influence the interest rates as this has a direct impact on monetary policy.

Factors to consider when looking for a high yield money market

  1. As we said earlier, the details, like rates of interest and lending periods vary. You must know what it is that you are looking for. High yield can be relative depending on where you are. To some people a rate of five to six percent is enough. Others look for a rate of eight to ten percent. So before you determine the money market you want to invest in, you should define the kind of rate you expect.
  2. When initially starting out in money markets, it is advisable to go for tangible things. These include things such as bonds, treasury notes and real property. Commodity trading has proved to be extremely risky. Make sure you comprehend thoroughly how it works before venturing into it. Don’t let this make you shy off though – remember that as risky as commodity markets are, they are very profitable too if you get in with full understanding.
  3. If you are getting in for the short term, you need to understand, even for that short term, the market that you are going to operate in. Stick to a money market which you understand. Some high yield money markets are too complicated to understand especially for part-time investors. If you don’t understand the commodities and how they make the return, best to wait until you do. You also need to learn other things, like what will influence the interest rates, and who is in the market at that particular time when you want to invest.
  4. Consider the expense ratio of a money market. The expenses implied on you come directly from returns.
  5. The current interest rate is also an important factor to consider. The higher your interest rate or yield the higher your return. This is a bit different from knowing what kind of return you want. It tells you what you can expect from the market in the near future. If the yield is very low currently, don’t expect to see a big jump based on speculation. 
  6. Make sure you have access to your funds – your account should be accessible should you require your money back. For a newbie, your middle man should be able to help you with this. Make sure that you deal with a reputable firm.

If you have a little nest egg that you want to multiply quite quickly, then a high yield money market would be a suitable option. It may sound complex if you have not been in money markets before, but a little study of how it works will get you there. If you are not sure, start by investing a little, and then increase the amounts as you go forward.

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