1. 25 Investments: Introduction
  2. 25 Investments: American Depository Receipt (ADR)
  3. 25 Investments: Annuity
  4. 25 Investments: Art and Collectibles
  5. 25 Investments: Bonds
  6. 25 Investments: Cash
  7. 25 Investments: Closed-End Investment Fund
  8. 25 Investments: Common Stock
  9. 25 Investments: Convertible Bonds
  10. 25 Investments: Corporate Bond
  11. 25 Investments: Futures Contract
  12. 25 Investments: Life Insurance
  13. 25 Investments: The Money Market
  14. 25 Investments: Mortgage-Backed Securities
  15. 25 Investments: Municipal Bonds
  16. 25 Investments: Mutual Funds
  17. 25 Investments: Options (Stocks)
  18. 25 Investments: Exchange-Traded Funds
  19. 25 Investments: Preferred Stock
  20. 25 Investments: Private Equity
  21. 25 Investments: Real Estate & Property
  22. 25 Investments: Real Estate Investment Trusts (REITs)
  23. 25 Investments: U.S. Treasury Securities
  24. 25 Investments: Unit Investment Trusts (UITs)
  25. 25 Investments: Venture Capital
  26. 25 Investments: Zero-Coupon Securities
  27. 25 Investments: Conclusion

There is no more liquid investment than cash.  In essence, it is the definition of liquidity in that all other securities are converted to cash to achieve liquidity.  As noted in the introduction, a short-term government bond (Treasury bills or T-bill) is the definitional risk-free asset.  All other securities offer returns above this base level to compensate for the additional risk that they entail. (Related: How Much Cash Should I Keep in the Bank?)

 

Beyond physical cash bills and coins, cash held in a bank checking account is the most liquid asset there is. Other forms of cash equivalents offer very short maturity dates.  Any security with a maturity less than a year is considered a short-term cash equivalent. These include money market funds, certificates of deposit (CDs), US Treasury T-bills, commercial paper, and banker's acceptance notes.

 

Nearly every type of fixed income security offers a maturity date less than a year.  This includes certificates of deposit, Treasuries, Agencies (bonds based on mortgages), corporates, and municipals.  In this respect, they qualify as “cash”, or at least short-term assets and cash equivalents.   

 

Objectives and Risks

 

Cash held at a bank has a huge benefit in that it is insured by the Federal Deposit Insurance Corporation (FDIC). The current deposit insurance amount is $250,000 for an individual bank account.  Other financial institutions (such as traditional brokers) also have banking operations, so be sure to check for specific FDIC insurance coverage.

 

Money market and other related funds don’t carry FDIC insurance.  The distinction is important, especially for investors concerned with downside protection.  It makes little sense to stretch into risky cash-related assets since overall interest rates are low by historical standards.  Cash is mean to be safe.  

 

How To Buy or Sell It

 

Investors can hold cash by physically owning it, or opening a checking account at a bank or brokerage account.  Brokerage cash is generally held in a money market fund.  Checking account fees are usually low, or waived for certain cash minimums.  Money market expense ratios are generally also low, but stated like with a standard mutual fund.

 

Strengths

 

There is no greater liquidity than cash!

FDIC insurance

 

Weaknesses

 

Liquid investments, but returns are very low

Inflation risk – loss of purchasing power

 

Key Considerations

 

Liquidity:  High (the highest!)

Historical Returns:  Low (very)

Inflation Protection:  Low (in fact, none)


25 Investments: Closed-End Investment Fund
Related Articles
  1. Investing

    Understanding Financial Liquidity

    Understanding how this measure works in the market can help keep your finances afloat.
  2. Financial Advisor

    Why Cash is King When Markets are Volatile

    After the past several years, you might be addicted to equity. But when markets turn volatile, cash is the best option. Here's why.
  3. Personal Finance

    The History Of The FDIC

    Find out why this corporation was developed and how it protects depositors from bank failure.
  4. Investing

    What is the Cash Ratio?

    The cash ratio is the ratio of a company's total cash and cash equivalents to its current liabilities.
  5. Insights

    What is Liquidity Risk?

    Liquidity risk is the risk of being unable to sell an asset fast enough to avoid loss.
  6. Investing

    The Money Market

    The money market provides a relatively stable place to park capital that may be needed within a short time horizon.
  7. Investing

    Bank Failure: Will Your Assets Be Protected?

    The SIPC and FDIC insure against personal financial ruin when banks or brokerages go belly up.
Frequently Asked Questions
  1. What is the difference between a lien and an encumbrance?

    Understand the legal terms ''lien'' and ''encumbrance,'' and learn the significant distinction between these two essential ...
  2. How Oil Cos. Treat Reserves on a Balance Sheet

    Oil reserves are estimated quantities of crude oil that have a high degree of certainty.
  3. How do I calculate how much home equity I have?

    Find out how to calculate the home equity in your home, your home equity percentage and the loan-to-value, or LTV, based ...
  4. Who Benefits From Loaning Shares in a Short Sale?

    Does loaning shares in a short sale transaction derive any benefit other than interest on the loan?
Trading Center