Advantages
- Predictable earnings
- Highly liquid
- Relatively low risk to principal
Tradeoffs
- Relatively low returns
- May not outpace inflation
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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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