Title: Safely Parking Cash Between Trades: A Look at Money Market Funds
There comes a time between trades when investors want their cash to be parked in a safe and liquid place while still making a little income. Louis P. faced the same query and wrote into the CNBC Investing Club’s Club Mailbag, asking where he could park his cash to ensure both liquidity and some yield. Personal finance expert Jim Cramer and his team of analysts emphasized that they can’t offer personal investing advice but were happy to consider this more general question.
**Understanding Money Market Funds and Their Advantages**
When you want cash on hand to buy stocks on a moment’s notice and simultaneously make some yield, money market funds are the best option. Unlike a certificate of deposit (CD), which requires keeping your money in the account for a specified time without withdrawing, money market funds offer immediate access to funds. Furthermore, these funds maintain their value and offer higher yields than most savings and checking accounts. According to money market tracker Crane Data, the average yield of the 100 largest money market funds is 5.19%, while the national average rate on savings accounts is only 0.6%.
**Differentiating Money Market Funds and Accounts**
Money market funds are not the same as money market accounts and other types of deposit accounts. The former are low-risk investments and are not backed by the Federal Deposit Insurance Corporation (FDIC). Money market funds can be accessed more readily than money market accounts when placing trades, as they sit in your brokerage account alongside your positions.
**Alleviating Concerns about Liquidity and Yield Lock-in**
Money market funds invest in very short-term, high-quality securities, offering continuous access to funds. Although the yield isn’t fixed given their constantly adjusting portfolio, they still offer attractive yields. Despite there being rare instances of extreme financial stress that “broke the buck,” causing people to not retrieve 100% of their funds quickly, money market funds are known for being low-risk investments.
**Final Recommendations for Parking Cash**
Investors who desire some enhanced yield on readily available cash should consider money market funds. The default money market option in your brokerage account can be set up to automatically deposit your cash into an account yielding around 5%.
In conclusion, while money market funds are a great option for safely parking cash between trades, it’s always worth consulting with a financial advisor to find the best solution for your specific investment needs.
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