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What is "cash"? A path to safety & security

Cash investments can lower the overall risk of your portfolio and give you a place to hold money while you wait to invest it.

POINTS TO KNOW

  • Cash investments are a place to keep money safe from market risk.
  • Your choice between money markets and CDs depends on factors like whether you need to lock in a certain yield and whether you prefer to be covered by FDIC insurance.

Why invest in cash?

Cash investments are very short-term investments. While intended to be completely stable, they aren't quite as safe as a bank account. So why bother with them? If you have money you need to keep safe—because you plan to spend it soon or because you're holding onto it while you research other investments—you can often earn a little more interest than you'd get in a bank account.

But making money isn't the goal of these investments. They're meant to protect money you already have.

What is a money market?

These securities have ultra-short-term maturities (from a few days to 1 year) and are considered nearly risk-free. Their share prices are intended to be completely stable, although the interest rates they pay will fluctuate (and the stability of the share price isn't guaranteed).

Money markets are also extremely liquid. You can invest in them through a mutual fund.

What is a CD?

Certificates of deposit (CDs) are promissory notes issued by banks. As such, they're insured up to a certain amount by the Federal Deposit Insurance Corporation (FDIC) and considered completely safe if held until maturity.

Like bonds, CDs have a specified interest rate and maturity date (usually 5 years or less).

If you buy a CD through a bank, you'll pay an interest penalty if you need your principal back before the maturity date. If you buy a CD through a brokerage, the value of the CD will fluctuate but there's no penalty for selling the CD on the secondary market before maturity.


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REFERENCE CONTENT

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Interest

Income you can receive by investing in bonds or cash investments. The investment's interest rate is specified when it's issued.

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Maturity

The length of time between a bond's issue date and when its face value will be repaid.

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Risk

Usually refers to investment risk, which is a measure of how likely it is that you could lose money in an investment. However, there are other types of risk when it comes to investing.

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Liquidity

A measure of how quickly and easily an investment can be sold at a fair price and converted to cash.

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Mutual fund

A type of investment that pools shareholder money and invests it in a variety of securities. Each investor owns shares of the fund and can buy or sell these shares at any time. Mutual funds are typically more diversified, low-cost, and convenient than investing in individual securities, and they're professionally managed.

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Bond

A bond represents a loan made to a corporation or government in exchange for regular interest payments. The bond issuer agrees to pay back the loan by a specific date. Bonds can be traded on the secondary market.

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Secondary market

A place where investors buy and sell to each other (rather than buying directly from a security's issuer). Most stock and bond trading happens on the secondary market.