It’s always difficult make a decision when it comes to investing your hard earned money. If you are made of stronger stuff, you can dabble in the stock market. Otherwise, you can look at steady and reasonably reliable options like money markets or certificate of deposits. Before we compare the two, it is important to understand the investment options.

Certificate Of Deposit

A Certificate of Deposit (CD) is a term based deposit or a promissory note issued by bank for a fixed interest rate, insured by the Federal Deposit Insurance Corporate (FDIC). An investor can purchase a CD for any denomination and earn the principal plus interest after term maturity. The investor also has the option to withdraw money from the CD before maturity if required, at the cost of some penalty. The main advantage of CD is that it offers higher rates than savings account and Treasury Bills.

Money Markets

Money Markets are deposit accounts that offer a relatively higher rate of interest as compared to a savings account. Money Market accounts can be opened at any financial institution. The difference between a CD and money market account is that the latter functions as a checking account. As an investor, your money is not tied up and you can withdraw your money as needed without incurring any penalty. In some cases, you may be required to give a short notice.

Some restrictions that differentiate the operation of money markets from checking accounts are the requirement of high minimum balance and a limit on number of monthly transactions. If you violate any of these restrictions, you will be charged very high service fees. Like CDs, Money Markets are also insured by FDIC and are considered a relatively low risk investment. They offer slightly rates slightly lower than the CDs but still higher than the savings account. Money Market account rates are determined by the amount deposited, higher the amount of investment, higher the rate. The interest rates are not determined by duration of investment.

Choosing Between The Two

Money Market for short term and higher liquidity: Clearly, money market is a better option for short term investment as it offers all the features of a CD as well as acts as a savings account. If you think you can work with the restrictions provided by banks/financial institution around the money market account, then this is recommended as a form of investment. Another advantage of investing in money markets is that if the market is doing well or the interest rates improve, you can withdraw this money and invest in better schemes like stocks, mutual funds etc. As interest rates are determined by the amount deposited, big investors gain more out of money markets.

CDs for long term and lower liquidity: If you can have surplus money that will not be required for a long duration of time, than CDs are good as they offer a higher rate of interest than money markets.