Differences between Money Market and Certificate of Deposit

March 26, 2010 by Jay
Filed under Business Finance, Loans and Deposits, Personal Finance

One common question among investors today is the difference between a money market certificate and a certificate of deposit issued by credit unions to them. Let us learn more of these differences as we go along this article.

The money market certificates refer to term investment with final maturity of less than a year. It is often offered by credit unions to investors. The credit unions are lending companies like banks that are operated by its members or depositors instead of stockholders. The counterpart of deposits in banks is shares in credit unions. These shares earn the same interest rates as of deposits in the bank.

Compared to money market certificate which has a maturity period of less than a year or at least a year, the certificate of deposit has a maturity period of any time. The certificate of deposit refers to debt tools in banks that have fixed maturity period and interest rates. Once you have secured this certificate you are aware on the exact amount of money you will receive from the bank when the maturity period ends. Typically, interest rates are much higher for longer maturity periods. The maturity period may range between weeks and years. However, certificate of deposit is considered as a fixed deposit account, thus any early withdrawal made from this account will incur penalties from the amount of interest. If you do not want this to happen, do not touch the money savings until the period of maturity lapses.

Money market certificates are more flexible than certificate of deposits. It combines the benefits of savings or checking account and certificate of deposits. It has similarities with other mutual funds whereas the only difference is that it has low risk of investments such as CDs, savings bonds, government t-bills, and other financial tools that are naturally conventional. Funds from money market certificates come with check book that be used in withdrawing cash. This is advantageous for liquidation. The only disadvantage of money market certificates is the varied interest rates, thus you will not know the exact amount of money you will receive after a particular duration.

A money market certificate is regarded as a savings account with high interests. Just like any regular savings bank, the certificate can be opened easily and quickly at any bank. However, compared to regular savings bank, the certificate has higher minimum balance requirements and interest rates as well.

A certificate of deposit is often issued by brokerage firms and commercial banks with specified maturity date and interest rates. The maturity date can be 3 months to 5 months. With this maturity period, the funds cannot be withdrawn until the maturity lapses. At the end of every term, the deposit is often returned with interest to the account holder.

Whether you want to get a money market certificate or a certificate of deposit, your financial situation and needs are often the basis. Therefore, it would be best to consult a finance expert or professional first before opting to buy any of the certificates. This is much recommended especially if you are not sure which one to get.