Part 10 of 11

Which is a Better Investment, The Certificate of Deposit or The Money Market Account?

One of the biggest questions in- vestors face is, “what do I do with my cash when I'm in-between in- vestments?” This article seeks to examine two of the most popular choices - certificates of deposits and money markets - and weigh the pros and cons of each.

In the left corner: Certificate of Deposit

Certificates of Deposit (or CDs for short) are debt instruments used by banks and other financial institutions to investors. In exchange for lending the institu- tion money for a predetermined length of time, the investor is paid a set rate of interest. Matur- ities on certificates of deposit can range from only a few weeks to several years with the interest rate earned by the investor increasing in proportion to the time his capital is tied up in the investment.

Pros: The investor can calculate his expected earnings at the outset of the investment period certificates of deposit are FDIC insured for up to $250,000 and offer an easy solution for the elderly who desire only to maintain their capital for the remainder of their life.

Cons: If the investor opts for longer maturity and, thus, higher rate of interest, he will lose access to his funds and forgo alternative uses of his capital.

In the right corner: Money Markets

Money market funds on the other hand offer many of the same benefits as certificates of deposit with the added features of a checking account. Technically speaking, a money market fund is more or less a mutual fund that attempts to keep its share price at a constant $1.00. Professional money managers will take funds deposited in the money market and invest them in government T-bills, savings bonds, certificates of deposit, that other safe and conservative instruments. This income is then paid out to the owners of the money market.