Money Market Funds and Certificates of Deposit
If you’re looking for safe investments but want to get more interest than you’re getting in a bank savings account, you might consider money market funds or certificates of deposit:
Money market funds are a place to park money you need in case of emergency. They invest in very safe fixed-income securities, such as highly rated investments that come due in 90 days or less. Money markets generally invest in short-term Treasurys and commercial paper.
Commercial paper obligations are loans generally given to creditworthy companies to fund short-term needs, such as buying goods to be sold in a few months. Money markets, however, aren’t insured by the Federal Deposit Insurance Corporation (FDIC).
Money markets are relatively safe, but not bulletproof. During the financial crisis that erupted in 2007 and 2008, one money market fund, the Reserve Primary Fund, “broke the buck” and returned just 99 cents of every investor’s dollar.
Bankrate.com is a useful site to find the best money market fund for you. The site’s CD & Investments tab has a great money market account screener that you can use to pick a money market account that best suits your needs.
Certificates of deposit (CDs): If you want an even safer investment than a money market — and are willing to take a lower return — you might want to consider a certificate of deposit. CDs are typically issued by banks, and their interest rates can vary quite a bit. CDs are also usually insured by the FDIC.
If you buy a CD, your money is locked up, and you’ll usually get hit with a penalty if you need the money earlier than its maturity. If you need access to your money, a money market might be a better choice.
If you’re looking for the highest CD rates, these sites might help:
Bankrate.com: Bankrate.com can help you track down a money market fund, and it can also help you pinpoint the highest-yielding CDs. Just click the CDs & Investments tab to bring up a page with various CD tables, CD calculators, and CD search tools.
MoneyRates.com: This site lists national averages for CDs, money markets, and Treasurys.
iMoneyNet: And you thought iMoney was the green stuff you set aside to buy a new iPhone. iMoney is in fact a great source of info for all things money funds related. It explains the different types of money funds and provides average rates. You can also use the site to find large and highly regarded money market funds.
You might be able to buy some money market funds through your online broker, but sometimes you need to contact the money market provider directly through its website. With CDs, you need to sign up over the bank’s website.
Online Investing Glossary
60 percent margin requirement
The requirement that you must put up 60 cents of every $1 you invest.
Online Investing Glossary
annual report to shareholders
A document that contains all the required financial statements and information contained in the 10-Ks presented in a colorful format.
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average daily share volume
The number of shares that usually trade hands in a given day.
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balance sheet
A document that tells you what a company owns and what it owes.
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bond
An IOU issued by a government, a company, or another borrower.
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brokerage
A fee paid to a broker to handle investment transactions for you.
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capital gains
Income you’ve made on the capital you’ve invested.
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cash account
A brokerage account into which you deposit cold hard cash your broker uses to buy stocks for you.
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commission
The price brokers charge for executing trades.
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Consumer Price Index
The measure of how much prices for the things individuals buy are changing.
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days to cover
The number of days it would take, on average, for the number of shares that are being shorted to trade.
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diversifying
To spread your risk over a wide swath of investments.
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dividend yield
The amount of return you’re getting in the form of a dividend, in other words, how big the dividend is relative to what you’ve invested.
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dividends
Cash payments made by companies to their investors.
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earnings reports
A document that tells you how much the company made during the quarter. Earnings reports also contain all the vital financial results for the quarter, including the net income (or total profit) as well as earnings per share, which is how much of the company’s profit you can lay claim to as a shareholder.
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Exchange Traded Funds; ETFs
Groups of stocks, much like mutual funds, that trade like stocks.
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geometric mean
The way to correctly measure stock return.
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holding period
The length of time you hold a stock.
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income statement
A document that outlines how much money a company made.
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limit orders
Trades in which you set the price you’re willing to accept.
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maintenance margin
The percentage of ownership of stocks relative to what has been borrowed (typically 30 percent or higher at most firms) most online brokers require investors to maintain.
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margin account
An account type that lets you borrow money you can use to buy stocks.
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mutual funds
Money collected from many investors and used to invest in a basket of assets.
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number of shares outstanding
The number of shares that are in the hands of investors.
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options
If you own an option, you have the right, but not the obligation, to buy or sell an investment, including shares of stock by a certain preset time in the future.
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penny stocks
Stocks that trade for less than a dollar.
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Producer Price Index
Tracks prices paid by companies that create goods. When prices are rising, both bond and stock investors pay attention because that affects the value of their investments. Stock investors typically don’t like inflation because it drives up costs and makes their investments worth less.
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proxy statement
A document that describes company matters to be discussed and voted on by shareholders at the annual meeting.
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shareholders’ equity
The difference between assets and liabilities is what portion of the company shareholders own, called.
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short squeeze
What happens when the short sellers get nervous that a stock they’re betting against will rise and they rush out and buy the stock back so that they can return it to the brokers they borrowed it from.
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taxable accounts
The standard accounts that come to mind when you think about investing online.
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tax-advantaged accounts
Accounts that are sheltered in some way for some period or other from the Internal Revenue Service.
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total return
The amount a stock has gone up plus its dividend.
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turnover
The amount of buying and selling a fund does.
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valuation ratios
An estimation a stock’s value computed by comparing the stock price with a measure taken from the company’s financial statements.
Online Investing Glossary
volume
A measure of how many times shares of a stock or ETF trade hands.
