Money market investments are short-term loans you make to governments and large companies, and they pay you interest for the use of your money

A money market investment is a way to lend money for a short period—usually a few days to a year—and earn interest on it. When you buy a money market investment, you are essentially lending money to a government agency, a corporation, or a bank. That borrower promises to pay you back the full amount plus interest by a specific date. The interest rate is typically higher than what a regular savings account pays, but lower than what you would earn from stocks or bonds that last longer.

Money market investments are different from a money market account at a bank. A money market account is a type of savings account. Money market investments are actual securities—pieces of debt that you own and can trade. They are also called money market instruments or short-term debt securities.

Key Takeaways

  • Money market investments are short-term loans to governments and corporations that mature in less than one year and pay interest.
  • Common types include Treasury bills (issued by the U.S. government), commercial paper (issued by corporations), and certificates of deposit (issued by banks).
  • You can buy money market investments directly from the issuer or through a brokerage account, and they are considered lower-risk than stocks.
  • The interest rate you earn depends on how long you lend the money and what the current market conditions are.
  • Money market investments are not the same as money market accounts, which are bank savings products.

The main types of money market investments

Treasury bills are short-term loans to the U.S. federal government. The government borrows money for 4 weeks, 13 weeks, 26 weeks, or 52 weeks. You buy a Treasury bill at a discount—meaning you pay less than the full face value—and when it matures, the government pays you the full amount. The difference between what you paid and what you receive is your interest. You can buy Treasury bills directly from the U.S. Department of the Treasury through a website called TreasuryDirect, or through a bank or brokerage.

Commercial paper is a short-term loan to a large corporation. A company that needs cash for a few months will issue commercial paper instead of taking out a bank loan. You lend the company money, and they pay you back with interest in 1 to 270 days. Commercial paper typically pays more interest than Treasury bills because companies are riskier borrowers than the federal government. You usually buy commercial paper through a brokerage account, not directly from the company.

Certificates of deposit (CDs) are loans to a bank. You give the bank a sum of money for a fixed period—anywhere from a few weeks to five years—and the bank pays you a set interest rate. CDs that mature in less than one year are considered money market investments. You can buy CDs directly from a bank or through a brokerage. Banks insure CDs up to $250,000 per account holder through the Federal Deposit Insurance Corporation (FDIC), so your principal is protected even if the bank fails.

Bankers' acceptances are a less common type. A bank guarantees that a company will pay back a short-term loan. You lend money to the company, but the bank promises to cover the debt if the company does not pay. Bankers' acceptances are used mainly in international trade and are bought and sold through brokerages.

How interest rates work on money market investments

The interest rate on a money market investment depends on two main things: how long the money is lent out and what the Federal Reserve is doing with interest rates overall. A Treasury bill that matures in 4 weeks will pay less interest than one that matures in 52 weeks, because you are lending the money for a shorter time. A commercial paper that matures in 30 days will pay more interest than a Treasury bill of the same length, because the company borrowing is riskier than the government.

When the Federal Reserve raises its benchmark interest rate, money market investments become more attractive because they pay more. When the Federal Reserve lowers rates, money market investments pay less. This happens because investors have other options—if stocks are paying good returns, they may move their money out of money market investments and into stocks instead. To keep investors interested, money market investments have to offer competitive rates.

You will see money market interest rates quoted as an annual percentage rate, or APR. This is the interest you would earn if you held the investment for a full year. If you hold it for a shorter time, you earn a proportional amount. For example, if a 52-week Treasury bill pays 5% APR and you hold it for 26 weeks, you earn roughly 2.5%.

Where to buy money market investments

You can buy Treasury bills directly from the U.S. Department of the Treasury through TreasuryDirect.gov. You create an account, link a bank account, and bid on Treasury bills in weekly auctions. The minimum purchase is $100, and you can buy up to $5 million per auction. TreasuryDirect charges no fees.

You can also buy Treasury bills, commercial paper, bankers' acceptances, and CDs through a brokerage account. A brokerage is a financial firm that buys and sells securities on your behalf. Examples include Fidelity, Charles Schwab, and Vanguard. Brokerages typically charge a commission or fee per trade, though some offer certain Treasury securities commission-free. You will need to open a brokerage account, which requires providing personal information and linking a bank account.

Banks sell CDs directly to customers. You can walk into a branch, call, or visit the bank's website to open a CD. The bank will ask how much you want to deposit and how long you want to lock the money away. The interest rate is set by the bank and does not change during the CD term. You can compare CD rates across banks to find the best offer.

The risks and trade-offs of money market investments

Money market investments are considered low-risk because they are short-term and issued by stable borrowers. However, they are not risk-free. If you buy a CD from a bank, your money is insured by the FDIC up to $250,000, so you will not lose your principal even if the bank fails. Treasury bills are backed by the full faith and credit of the U.S. government, so the risk of the government not paying you back is extremely low. Commercial paper and bankers' acceptances carry more risk because corporations can fail, but the risk is still lower than with stocks.

The main trade-off is that money market investments pay less interest than longer-term investments. A 10-year Treasury bond will typically pay more interest than a 52-week Treasury bill. A stock mutual fund may pay dividends and grow in value over time, earning you more money than a money market investment. The shorter the loan period and the lower the risk, the lower the interest rate you receive.

If you need to sell a money market investment before it matures, you can usually do so through a brokerage, but you may have to accept a lower price than you paid. Treasury bills and commercial paper are actively traded, so you can sell them fairly easily. CDs are harder to sell before maturity, and if you withdraw money early, the bank will charge you a penalty that can eat into your interest earnings.

Money market investments versus money market accounts

A money market account is a savings account offered by a bank or credit union. It works like a regular savings account, but it may pay slightly higher interest if you keep a large balance. Your money is insured by the FDIC (or the National Credit Union Administration if you use a credit union) up to $250,000. You can withdraw your money whenever you want, though some accounts limit the number of withdrawals per month.

A money market investment is a security—a piece of debt that you own. You buy it through a brokerage or directly from the issuer. It has a fixed maturity date, and you earn a set amount of interest. If you sell it before maturity, the price may go up or down depending on market conditions. Money market investments are not insured by the FDIC, though Treasury bills are backed by the government and CDs from banks are FDIC-insured.

Money market accounts are simpler and more flexible if you want easy access to your money. Money market investments typically pay more interest but require you to commit your money for a set period. The choice depends on whether you need liquidity—the ability to access your cash quickly—or whether you can afford to lock money away for a few months or a year.

How to get your free guide with money market investments

If you want to buy Treasury bills, visit TreasuryDirect.gov and create an account. You will need a Social Security number, a valid email address, and a U.S. bank account. Once your account is set up, you can place bids in the weekly Treasury bill auctions. Auctions happen every Monday for 4-week and 13-week bills, and every other Monday for 26-week and 52-week bills. You will receive a confirmation email when your bid is accepted.

If you want to buy other types of money market investments, open a brokerage account. You will need to provide personal information, including your name, address, Social Security number, and employment status. The brokerage will ask you about your investment experience and goals. Once your account is open and you have linked a bank account, you can search for money market investments and place orders. The brokerage will execute the trade and hold the security in your account until it matures.

If you want to buy a CD, contact banks in your area or search online for CD rates. Compare the interest rate, the maturity date, and any penalties for early withdrawal. Once you have chosen a CD, you can open it online, by phone, or in person. The bank will transfer the funds from your bank account and hold the CD until maturity. When the CD matures, the bank will pay you the principal plus interest, usually by depositing it back into your bank account.

Frequently Asked Questions

Can I lose money on a money market investment?

With Treasury bills and FDIC-insured CDs, you will not lose your principal—the amount you invested. With commercial paper and bankers' acceptances, there is a small risk that the issuer will not pay you back, though this is rare with large, stable companies. If you sell a money market investment before it matures, you may receive less than you paid if interest rates have risen, but you will still get your principal back when it matures.

How much money do I need to start investing in money market securities?

Treasury bills have a minimum purchase of $100 through TreasuryDirect. Commercial paper and bankers' acceptances typically have minimums of $25,000 to $100,000 through a brokerage. CDs have minimums that vary by bank, but many banks accept deposits as low as $500 or $1,000. Check with your bank or brokerage for their specific minimums.

What happens when a money market investment matures?

When the investment reaches its maturity date, the issuer pays you back your principal plus the interest you earned. If you bought the investment through a brokerage or bank, the money will be deposited into your account. You can then choose to reinvest the money in another money market investment, move it to a savings account, or use it for something else.

Do I have to pay taxes on money market investment interest?

Yes, the interest you earn on money market investments is taxable income. You will receive a Form 1099-INT from the issuer or brokerage showing how much interest you earned, and you will report this on your tax return. Interest from Treasury bills is exempt from state and local income tax but subject to federal income tax. Interest from CDs and commercial paper is subject to both federal and state income tax.

Can I buy money market investments in a retirement account?

Yes, you can buy money market investments in an IRA, 401(k), or other retirement account. The interest you earn is not taxed until you withdraw money from the account in retirement. This can be a good way to earn a steady return on a portion of your retirement savings while keeping the risk low.