poe

How do money markets work? Specifically Paypal's.

They say the average yield is 5.04% per 7-day period. Why is it measured in 7-day periods? Flipping through the prospectus it looks like the average yearly return is around 3%.

I don't get it.

Do I earn 5.04% once a year? Once a month? 3% once a year?

Enlighten me

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brownie

take the rate and multiply that by the amount of $ u have (which can obviously vary) then take that variable (figure) and divide by 365. that allows u to then figure what u r having for a certain time frame (like 7 days).
As an example:
$100,000 X 5.04% = $5,040. $5,040/365 = $13.81/day so take that $13.81/day x 7 days = $96.67 (interest earned for those 7 days). it sounds like they advertise it that way because quite a few people remove money quickly from their accounts. my numbers should b fairly accurate. i hope this helps!!

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poe

Thanks, Brownie!

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germ

"heckuva job, brownie!"

aico

I felt the floor move, when Brownie dropped the knowledge.

woj

paypal isn't an ideal place to put your money at, any day, for any reason they care freeze your funds and you may have fun time getting it back...

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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!!!!

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brownie

Crap!!! I totally fucked up and forgot to address another aspect of my original answer that I gave Poe. After this part I will totally shut up on this thread!!! I promise.
Okay Poe, the other part to my original answer up in the thread that I didn?t address was compounding. I?m referring to the compounding of the interest earned. If the interest compounds daily then here is how REAL numbers might look for a 7 day period in that money market acct using $100,000 at a 5.04% yield.

So, going back to my original example:
Original deposit amount: $100,000
Average yield: 5.04%

From my above (up higher in the thread) example we saw that $100,000 yielded a daily interest of $13.81/day.
So what we are going to do is then take that daily interest and simply add it to the prinicipal ($100,000) but it will actually grow a little bit day by day.

Day 1: $100,000 X 5.04% = $5,040. $5,040/365 = **$13.81/**day so take that $13.81 & add it to your original $100,000 so now we have $100,013.81 in the acct. now day 2 comes up but now we must add that 5.04% interest on the new principal amount which as we c is now $100,013.81.
So?.
Day 2: $100,013.81 x 5.04% = $5,040.70. $5,040.70/365 = **$13.81**/day so we take that $13.81 & add it to our new principal. $100,013.81 + $13.81 = $100,027.62 (new principal).
Day 3: $100,027.62 x 5.04% = $5,041.39. $5,041.39/365 = **$13.81**/day so we take that $13.81 & add it to our new principal. $100,027.62 + $13.81 = $100,041.43 (new principal)
Day 4: $100,041.43 x 5.04% = $5,042.09. $5,042.09/365 = **$13.81**/day so we take that $13.81 & add it to our new principal. $100,041.43 + $13.81 = $100,055.24 (new principal)
Day 5: $100,055.24 x 5.04% = $5,042.78. $5,042.78/365 = **$13.82**/day so we take that $13.82 & add it to our new principal. $100,055.24 + $13.82 = $100,069.06 (new principal)
Day 6: $100,069.06 x 5.04% = $5,043.48. $5,043.48/365 = **$13.82**/day so we take that $13.82 & add it to our new principal. $100,069.06 + $13.82 = $100,082.88 (new principal)
Day 7: $100,082.88 x 5.04% = $5,044.18. $5,044.18/365 = **$13.82**/day so we take that $13.82 & add it to our new principal. $100,082.88 + $13.82 = $100,096.70 (new principal)

So in 7 short days you simply placed $100,000 into an acct and 7 days later you now have $100,096.70. Now imagine if you had that money in there much longer than just one week. Imagine if that money was left in there for at least a couple of years. Well, we know from the example that the return would be at least $10,000 if it was left in the money market for at least 2 years (at those rates aforementioned).

Just a little food for thought. You would have made over $10,000 had you left your money in there for 2 years. Now, just think of how much the banks are making on this $100,000 that you deposited with them and then they loaned out that money at a higher interest rate. It?s pretty cool but without this system our banking system would be??well, I really don?t know what would happen without banks being able to hold money and then lend it out at higher rates. It?s that damn Lion King (yeah I saw it) saying?..?It?s the circle of life??and it really is with respect to this aspect falling into its place in the banking & financial markets.

That is the power of compounding and that is why the rich are able to capitalize on this beautiful subject in devastating (a beautiful devastating) ways.??wtf??go 2 bed brownie!!! Nite! Holla!!!

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spunkmaster

Anyone that uses "aforementioned" in a post isn't gettin laid much

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tolik

not bad thread.

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poe

wow, great answers brownie. thanks a lot!

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DaddyMustang

thats why gfy is good, brownie one of the ones making it that

NinjaSteve

http://en.wikipedia.org/wiki/Money_Market
A money market is a financial market for short-term borrowing and lending, typically up to thirteen months. This contrasts with the capital market for longer-term funds. In the money markets, banks lend to and borrow from each other, short-term financial instruments such as certificates of deposit (CDs) or enter into agreements such as repurchase agreements (repos). It provides short to medium term liquidity in the global financial system. Money market derivatives include forward rate agreements (FRAs) and short-term interest rate futures.

Trading takes place between banks in the "money centers" (New York and London primarily, also Chicago, Frankfurt, Paris, Singapore, Hong Kong, Tokyo, Toronto, Sydney, Mumbai, San Francisco).

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rowan

So the money market is basically for short term loans and deposits?

I'm still trying to figure out why in Australia the banks are charging a percent or two higher for home loans than the Reserve Bank's set interest rates, when the bulk of the funds they are lending would probably be customer's savings account balances. ie to draw a loan they do not need to borrow anywhere near 100% from the reserve bank, and with the shitty interest rates they pay on savings (between 0.0% - 0.5% p/a) they must be making an absolute killing by lending out their customer's money at 7% p/a.

rowan

I think the range "0.0% to 0.5%" I mentioned in my last msg was a little too generous.

DamageX

Hit me up, I'll give you a tip about how to get the best interest on your home loan.

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Deputy Chief Command

first and foremost think simple that one is important

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