Money Market Deposit Account
Investors wishing to understand a money market deposit account should learn to distinguish between it and a similar cousin: the money market fund. The money market fund is a type of fund issued by an investment institution that allows customers to buy into aggregate money market instruments. Money market mutual fund rates are usually lower than stock mutual fund rates but better than deposit account rates.
In contrast, a money market deposit account can be thought of as a bank account with high interest rates. It is offered by a bank to customers, who deposit some minimum amount and expect to receive good yield or high interest rates on the money residing in the money market deposit account. Because the returns are so stable and the risk of losing the principle is almost nil, these are considered low risk investments. On this site you can find about the highest money market rates.
Safe But Restrictive
The key point is that money market deposit accounts are considered to be as safe as savings account. The few caveats are that the minimum deposit limits tend to be higher, and the frequency of withdrawal from these accounts is severely limited. Customers who exceed such limits may find their money market deposit account cancelled or suspended. In fact, many people think of a money market deposit account as a type of savings account.
FDIC Insured
Conventional checking and savings accounts are insured by the FDIC in the sense that if the holding bank ever goes under, the federal government will step in and refund all of the customers with a pool of public money. A money market deposit account is exactly the same. Customers can rest assured that their money is backed up with the guarantee of a federal program. The same is not true of money market funds offered by fund companies. A money market fund is a type of non-banking account devised by the fund company that does not have the same advantages as a money market deposit account offered by a bank. Some brokerages also offer such accounts to their customers.
Check-Writing Privileges
Money deposited into a money market account is highly liquid, and can be drawn from it at limited intervals much like a regular bank acount. Checks can also be written from such accounts. However, there is usually a limit placed by banks on how many such transactions can take place in any period of time. The reason is that a certain of account known as a "transaction account" (which includes checking accounts) are subject to specific financial regulations that prohibit payment of interst. If a money market deposit account permits too many transactions, it must then be regulated as a "transaction account", thereby rendering any interest afoul of federal banking laws.
Bank-to-Bank Differences
The yield for money market accounts differs from bank to bank, institution to institution. Search for high yields by examining the yield rates and interest across a large number of banks. Keep in mind that the highest yield or the high yields may be due to severe restrictions in the minimum deposit amount, contingent upon opening of other accounts, or minimum time limits of deposit. Be aware of rating schemes too that rate any one bank very highly. This is because ratings are subject to manipulation.