Forex Investment and Currency Trading

Your investments reflect your decisions about how others can use your money. Be sure you can accept those uses. With that in mind here are the main types of investments.

Cash and Cash Equivalents

Since one strategy is to protect what you’ve already saved, there are investments designed with safety as the top priority. By investing in securities from an asset class called cash equivalents, you try to protect your money and earn a little income at the same time.

What Are Cash Equivalents?

They are securities that let you keep your money close and safe by lending it for very short periods (a day to a year) to borrowers with reliable reputations. Investments designed for protection are called cash equivalents because in practice, they’re designed to be almost as safe as cash.

Why Use Them?

Many experts recommend keeping on hand at least six months worth of income for emergency situations (like losing a job). You may also choose to invest in cash equivalents if you’re close to the time when you will be using the money. For example, you may have enough for a down payment on a home and don’t want to risk losing it.

Money Market Funds

These are similar to savings accounts except that your money is pooled with other customers into one large sum. The money is then loaned to businesses for a short time, usually a week or less and sometimes overnight.

Money market funds are considered one of the safest investments. The interest earned is shared by all the customers and the bank takes a small fee for its efforts. Bank money market funds are federally insured. Money market mutual funds usually have private insurance, which has historically been very safe but isn’t as safe as federal insurance.

Savings Accounts

These are loans made to your bank with no time limits. You have the right to withdraw your money at any time. The bank lends your money to individuals or businesses and pays a portion of the interest it earns to you. While you earn some income from a savings account, it’s designed mainly to protect what you already have. The interest you earn is among the lowest of any investment and the income is taxable, reducing your income even further. Savings accounts are federally insured up to $100,000.

Certificates of Deposit (CDs)

These loans to your bank are similar to savings accounts except that they have specific time limits. You agree to let the bank use your money for a period of time and pay you interest in return. When the time is up, you can either renew the loan (roll it over), withdraw it, or use it in another way at the bank. The longer you agree to let the bank use your money, the higher the rate of interest you can earn. The amount you keep is reduced by the taxes you will have to pay on the amount you’ve earned.

U.S. Treasury Bills

These are loans to the U.S. government for ninety days or less. This is the safest investment because repayment is guaranteed by the U.S. government itself. Treasuries offer another benefit that increases your income: they’re exempt from state and local taxes so you keep more of your earnings.

Many investors use cash equivalents as temporary parking places until they’re ready to use the money for something else.

The Concept of Liquidity

The faster you can get your money from an investment, the more liquid it is considered to be.