Points to know
- Cash investments are a place to keep money safer 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.
How to invest
What are cash investments?
Cash investments can lower the overall risk of your portfolio and give you a place to hold money while you wait to invest it.
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Why invest in cash?
Cash investments are very short-term investments. While intended to be stable, they aren't quite as safe as a bank account. So why bother with them? If you have money you need to keep accessible—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. Cash investments are meant to provide a relatively low-risk investment option for money you already have.
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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.
What’s a money market?
These securities have ultra-short-term maturities (from a few days to 1 year) and are considered lower-risk investments. Their share prices are intended to be 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.
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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.
What’s 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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Bond
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.
All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.
All brokered CDs will fluctuate in value between purchase date and maturity date. The original face amount of the purchase is not guaranteed if the position is sold prior to maturity. CDs are subject to availability.
As of July 21, 2010, all CDs are federally insured up to $250,000 per depositor per bank. In determining the applicable insurance limits, the FDIC aggregates accounts held at the issuer, including those held through different broker-dealers or other intermediaries.
For additional details regarding coverage eligibility and insurance limits for other types of accounts, visit fdic.gov.
Bank deposit accounts and CDs are guaranteed (within limits) as to principal and interest by the Federal Deposit Insurance Corporation, which is an agency of the federal government.