Last Updated on July 24, 2022 by The MediFi Guy
So what exactly is investing? For our purposes, to invest refers to the act of buying one of the following things:
1) Stocks, also known as Shares or Equities (all synonymous)
2) Bonds
3) Cash
4) Property
The proper term for the aforementioned things is “asset classes“
Cash
The easiest way of conceptualizing “cash” investments is to just think of cash (also known as money market securities or money market instruments) as super short-term bonds that last 12 months or less.
Because the period until maturity is so short (1 year or less) cash is the lowest risk but also the lowest return type of investment. It also tends to have high liquidity.
Liquidity in this context refers to how readily accessible the investment is to be bought or sold. The higher the liquidity the more quickly available the money from the investment is.
Money in a conventional savings account has high liquidity because you’re able to withdraw it at any time. Money invested in shares is less liquid because you first have to put the shares up for sale, someone has to buy the shares, the transaction has to be processed, you have to pay brokerage fees on the sale, etc before you get the money, which takes a long time and also affects the selling price of the shares (ie selling many shares all at once increases supply, thereby lowering the price that people are willing to pay for it).
Since the cash investments mature within one year they are more liquid than bonds (5-15 years) and stocks (decades to get a high average return).
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