So PLM, the brokerages have to make money somehow, now that they offer free trading and don’t make as much off of the trading, so the they do this with the “float” of your money. So there’s a little caveat to each investment choice. Here’s my understanding of how it is (at least at Schwab). I stand to be corrected by anyone more knowledgeable though…
1. Money Market: the issue with money market is (1) it isn’t insured and (2) it’s like a mutual fund with a settlement date. So there’s 1 day settlement date.
2. CD’s purchased from brokerage. You’re not going to earn interest at the CD rate between the time you purchase the CD and the when the CD term starts (the settlement date). You’ll be earning interest at the rate for your cash held in your brokerage account (cash sweep option), which is probably <1%.. Read the fine print. Let me show you what I mean.
[img_assist|nid=27757|title=cdexample|desc=|link=node|align=left|width=500]
In this example here, you can buy this 1 month cd right now that supposedly has a APY/YTM 3.918% / 3.850%... However, the settlement date for the CD isn't until 11/30/2022... What that means is even if you buy the CD today (11/23), you aren't going to be earning 3.918/3.85% until November 30th when the CD is actually purchased. Between now and 11/30, you're money will be earning the brokerage's interest rate for cash held in the account (which is probably less than 1%). The brokerage house holds on to your cash and actually does the purchase on 11/30... This doesn't matter as much if you buy a longer term CD like a 3 month or 6 month, but if you're buying a 1 month CD, having your cash held for 2 weeks almost half of the term of the CD...And in that case, you're better off buying the money market at 3.74% (I mistyped the yield above at 3.47..It's 3.74%..
If you do buy a CD from your brokerage, you want to buy it right before the settlement date, not weeks before. Sometimes, the CDs sell out the day before settlement, so you might need to check 2 days prior.
The other thing to think about wrto the CD, is what happens after it matures. You can elect to have it automatically roll into the specific bank's next term CD, but you won't know what the interest is. If you don't let it auto-roll, then when your CD matures, it will go back into your brokerage account, and then you'll need to buy another CD, with a waiting period until that new CD's settlement date is reached.
Hence, this is how brokerage makes money... You're paying for the convenience of doing this all from your brokerage account. But they are making money while they keep your cash until the CD settles and keeps the cash at the lower rate until the next CD you buy, if any.
3. CD's bought directly from a bank. If you buy a CD directly from a bank, there's usually no waiting/settlement date. Interest starts accruing right away.. But it can be a pain in the ass to move money to a bank and then when the thing matures move it back, especially if you're only doing 1 or 3 month CDs... And there's usually like a 2-3 days wiring transfer delay for money transfers between bank and brokerage.
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So, comparing the money market at 3.74% to the 1 month CD at 3.91% offered at schwab for purchase, the money market is probably better because since it just 1 day of settlement when you buy and when you sell the money market. You can get above 4% CD's for longer terms like 3/6/12 months. But the issue is if the Fed keeps raising rates, might not be a good thing to lock into a 6-12 month CD.
I buy both the money market and the 1 and 3 month CDs from Schwab, because I'm paranoid... although it's very unlikely Schwab's money market would collapse and not pay out, I just like to err on the side of caution and not put all my emergency fund into one basket.
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The other thing I noticed is a slight difference between Schwab and other brokerages like Fidelity and Vanguard.
With Fidelity and Vanguard, you can designate how you want your cash to be held by the brokerage. So for example, you can designate that cash in the account be held in a "cash-sweep" account that is automatically invested into a money market fund. So in my Fidelity whenever I sell something, the proceeds auto-invest in the Fidelity money market FDRXX that currently has a 3.31% yield. https://fundresearch.fidelity.com/mutual-funds/performance-and-risk/316067107
Vanguard is similar...
Schwab use to allow you designate your cash-sweep account to default to their SWVXX money market fund. But they no longer allow this. So after you sell an investment it defaults to a cash-sweep account that earns very little interest, I think less than 1%..And you have to explicitly move it into the money market fund...
Again, I think Schwab does this so they can make money on the float, while offering you a higher rate than Vanguard and Fidelity on the money market.
Fidelity allows you to auto-invest your cash into their money market, but their yield is about .50% lower than schwab.
If you move in and out of positions all the time, Schwab is probably not a good option for you because you need to move your settled funds in and out of the money market to get the rate.
If you buy stocks occasionally and sell occasionally, then it's not that much of an effort to do an extra step to move cash into the money market fund....
Pick your poison 🙂
I will probably move my more frequently trading account to Fidelity.
