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Advantages

  • Predictable earnings
  • Highly liquid
  • Relatively low risk to principal

Tradeoffs

  • Relatively low returns
  • May not outpace inflation
 

Types of Investments: Cash

Cash and cash alternatives

In daily life, cash is all around you, as currency, bank balances, negotiable money orders, and checks. However, in investing, "cash" is also used to refer to so-called cash alternatives: investments that are considered relatively low-risk and can generally be converted to cash quickly. Some examples of cash alternatives include savings accounts, money market deposit accounts, money market funds, certificates of deposit, guaranteed investment contracts (GICs), government savings bonds, U.S. Treasury bills, Eurodollar certificates of deposit, and commercial paper.

Using cash alternatives

Because of their conservative nature, cash alternatives involve the least risk. However, there is a tradeoff for their relative safety: Their potential return is not as high as investments that involve more risk. By focusing solely on playing it safe, you may limit your investment income, especially over longer time periods.

Cash alternatives can be useful in many ways. First, they can provide relative stability. While cash alternatives can't assure you of a gain or protect you from losses, they are generally considered safer than other asset classes, such as stocks or bonds. Also, they can provide income on cash that would otherwise be idle. They can serve as a ready source of cash to pay bills or make purchases. For example, cash alternatives can help preserve money earmarked for a down payment or a family vacation. Readily available cash also can help you cope in a financial emergency. Finally, cash alternatives can serve as a temporary parking place when you're not sure where to invest.

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Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual's personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.