Most of the time, when an investor or analyst searches through the financial statements of a publicly traded company, he or she will run across a reference to short-term liquid assets, or cash and cash equivalents. A lot of companies explain cash positions in a couple of sentences, if not a paragraph, that is similar to the following:
The following summarizes our cash and cash equivalents and marketable securities:
Cash and cash equivalents: $239
Marketable securities: $154
This example shows that a business using short-term marketable securities classifies them as a "cash equivalent". Marketable securities generally refer to an investment in commercial paper, banker's acceptances or Treasury bills. These securities are highly liquid, and generally provide the company a bit of a return on its investment - likely just enough to keep up with inflation. If all of the company's cash equivalent reserves are tied up in cash, it will lose a little bit of spending power every year to inflation.
Investment in equity is investment in stocks, or similar securities. While these are usually recognized as being highly liquid, they have a tendency to fluctuate in value - often dramatically. Stocks are not a great investment for a cash equivalent account. Although they can be readily converted to cash, there may be a significant spread between a stock's book value and its current price. A negative spread could result in a cash crunch. (See What's the difference between book and market value?)
The essential thing to note is that a marketable security will likely only be worth significantly less than what it was purchased for if there's a spike in interest rates. Equity investments, on the other hand, have a lot more potential to drop in value and are, therefore, not considered cash equivalent investments.
For more information, see Reading The Balance Sheet, Getting To Know The Money Market and Cash-22: Is It Bad To Have Too Much Of A Good Thing?
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