UNIVERSITY OF ILLINOIS
College of Business - Department of Finance
Finance 300 (Financial Markets)
Cash investments — also called cash equivalents — such as certificates of deposits (CDs), money market accounts, and
Treasury bills, usually play a small but important role in an investment portfolio. Cash investments can help you protect your
principal, save for short-term goals, and provide liquidity.
Cash investments expose you to less risk than either stock or bonds. If they are bank deposits, like CDs, the money is insured by
the FDIC. Treasury bills are backed by the federal government and their short terms limit inflation risk. However, the safety of
cash investments is offset by the more modest returns that they have historically paid.
Keeping a limited amount of your portfolio in cash equivalents lets you take advantage of new investment opportunities as they
arise. Equally important, if you keep three to six months’ worth of living expenses readily available in highly liquid, easily
accessible cash equivalents, you can tap those assets to cover unforeseen and emergency expenses.
Their liquidity — or easy convertibility to cash — and price stability means that cash equivalents can play a role in both your
saving and investing strategies. But keep in mind that these super-safe investments have their own risks.
Cash investments, also called cash equivalents, are short-term investments that earn interest, figured as a percentage of your
One key difference between cash investments and other investments is their liquidity, which means they can be converted to
cash quickly and easily with little or no loss of value. For example, if you invest $1,000 in a cash equivalent, you can expect to
get $1,000 back, and perhaps some interest as well. If you invest $1,000 in stock, you might be able to sell your shares for more
than $1,000, but you might also have to sell for less.
As part of your overall portfolio, cash investments can provide a buffer against fluctuations in the value of your more volatile
assets, such as stocks. Keeping a limited amount of your portfolio in cash equivalents also lets you take advantage of new
investment opportunities as they arise. And you can use cash investments as part of your emergency fund to cover unexpected
Types of Cash Equivalents
While all cash equivalent investments are similar in providing liquidity and price stability, there are some important differences
among the four major types of investments in this category: certificates of deposit (CDs), U.S. Treasury bills (T-bills), bank
money market accounts, and money market mutual funds.