Quote:
Originally Posted by poe
Thanks, Brownie!
|
your welcome poe! but as i revisit the original part of your question i feel bad for not at all addressing that original question u had.
your original question:
How do money markets work?
*** I will answer this question with some overall generalities but this is the essence of how it works (but there are many possible variations to different variables used below)
well, the money market system is really an idea that is known for typically having higher minimums to get into but also you would receive a better rate of interest than a traditional checking account per se. the money market system is very well known in the financial markets as also having a high degree of liquidity (in case u didn't already know, liquidity is simply how quickly you can actually turn those funds into actual cash in your hands). checking accts, saving accts & money market accts are known for having a high degree of liquidity. i used to be an investment broker for many years, so those that have a brokerage acct are familiar w/ placing money into their brokerage acct and putting that money into a money market acct until they know exactly what they are going to be doing with those funds (are they buying stock(s), mutual fund, ETF's, options, whatever). The money market is a place where the money can be placed but as soon as they want to make a move (and pull the trigger and buy into some type of security/financial instrument like a stock, mutual fund, etc) the can do so relatively quickly. They put an order in and technically those funds are taken out of money market and put to work in the appropriate area (buying of stocks, etc). when u have money in a money market acct u also have an incredible amount of assurance that your money will be earning XYZ rate of return and you know with some degree of certainty when you take your $ out of the money market acct just how much money you will have left. let's compare that to having $ in a stock. Well if it's a heavily traded stock (like say Microsoft) then you will also have a high degree of liquidity. That's because there is such a big market of buyers & sellers of that stock that you will definitely be able to sell that stock any time the market is open. BUT, one big difference is when it comes time to sell your Microsoft stock that you do not have such a high degree of certainty of what actual price you are getting on your Microsoft stock when you sell it. There are different ways to sell a stock but a common way is simply an open order (at the best price) to sell the stock via a broker or perhaps online. Either way the transaction is ultimately executed the same way. But if u r using a broker how long did it take from the time you gave him/her (your broker) the order to sell your Microsoft stock to the time he actually put your order in?? if you have a chunk of stock worth a pretty penny then even a $1-$2 price swing can have some serious implications in how much money you actually get for your Microsoft stock. that price swing could be good (stock went up while selling) or bad (stock went down while selling). Now remember your liquidity should be daily with your money market acct. that means if you sell out of the money market (*this is an area where I said I was speaking in generalities because there are some money market accts w/ banks that might penalize (fee) u if you chose to take your money out faster then what they had originally agreed to) in the morning u should be able to go out and buy some other financial instrument later that day. With the stock trade it?s different. You cannot actually touch proceeds from your stock sale for 3 days after the transaction date. So you have to wait 3 days before you can actually put your hands on that money.
Now, with respect to money market accts banks are usually going to be giving u a rate that is a little lower than what they are charging other people to borrow that money. That is, they are saying ?hey, mr. money bags, leave your money in this money market acct (at our bank) and we will give you XYZ rate of return?. So they are paying u interest to leave that money with them. Then what they do is turnaround and loan that money out to other people at a higher rate of interest. The spread between what they are giving you in interest and what they are charging (interest) other people to use/loan $ from them is where they are making their money. Remember the banks are basically just an entity that is in the business of selling money.
This answer may seem a tad convoluted and if I could explain verbally I would do a much better job but oh well. And REMEMBER that there are quite a few different nuances with respect to SO many different terms & conditions that banks will have with their money markets that speaking in generalities was just easier for giving some of the above examples. I?m sure if u read everything above u r bored as shit, but man after I forgot to address the original question I felt compelled to give an answer.
Holla!!!!
