Cash reserves are uninvested funds available to an investor that can be used when capital is needed.
Cash reserves are immediately available to an investor. Cash reserves are not encumbered by other investments, except for highly liquid assets where positions can be exited and converted to cash during regular business hours, such as Treasury bills and money market funds.
Cash reserves are typically held for emergencies when capital is needed to meet additional margin requirements from margin expansion or to take advantage of new opportunities.
Cash reserves may be necessary to purchase other assets or cover the cost of an unexpected event, such as an options assignment or margin expansion in an undefined risk position.
When most people think about cash, they think about the cash in their checking account used to pay bills and make purchases. But for businesses and investors, cash is a much more important asset.
Corporations often have large amounts of cash on hand for cash expenditures, to cover the cost of emergencies, and to make investments.
Businesses need cash to pay their employees, suppliers, and other expenses.
Investors need cash to buy stocks, bonds, and other assets.
Banks must have a specified amount of cash available at all times determined by the reserve ratio, which is a percentage of the bank’s overall liabilities.
Individual investors may have cash reserves readily accessible for withdrawal to ensure that not all their capital is exposed to market risk.
Cash reserves are typically kept in safe havens, such as a bank account or short-term, liquid investments. These cash equivalents are easily converted into cash and can be used to meet immediate needs.
When holding cash reserves, investors relinquish the opportunity to invest in other assets that may have a higher return potential. The decision of how much cash to keep on hand is personal and depends on the investor’s goals, risk tolerance, and investment time horizon.
Uninvested cash reserves should only make up a portion of an investor’s net capital. Cash is subject to decreased purchasing power if inflation rises, and idle money could equate to missed opportunities that would have generated higher returns if invested elsewhere.