What Is Cash?

In CeMAP, cash is treated as an asset class alongside equities (shares), bonds (fixed interest securities) and property. You'll need to understand what cash is, how it works, its risks, advantages and disadvantages, and where it is suitable for clients.

What is cash?

Cash is money held in bank accounts, building society accounts, savings accounts or short-term deposits. It is considered the lowest-risk asset class and the most liquid asset class.

Liquidity means how quickly an investment can be turned into spendable money without losing value.

Examples of cash investments

• Current accounts
• Savings accounts
• Fixed-term deposits
• ISAs (cash ISAs)
• National Savings products

Key features of cash

• Capital security — Value usually remains stable.
• Liquidity — Easy access to money.
• Low risk — Lower chance of losing capital.
• Low return — Usually lower growth than other assets.
• Interest-based return — Earns interest rather than dividends or capital growth.

Advantages of cash

• Low risk — Safer than equities, property and many bonds. The original capital is normally protected unless the bank fails.
• High liquidity — Money can usually be accessed quickly. Suitable for emergencies, short-term needs, house deposits and mortgage fees.
• Stable value — Cash does not usually fluctuate daily like shares. Less volatility means predictable value and less investment stress.
• Easy to understand — Cash products are straightforward compared with stocks, derivatives and investment funds.
• Suitable for short-term goals — Good for emergency funds, near-term purchases, clients approaching retirement and clients with low risk tolerance.

Disadvantages of cash

The biggest disadvantage is inflation risk: if inflation is higher than the savings interest rate, purchasing power falls.

Example: if savings interest = 3% and inflation = 5%, the real return is -2%, meaning your money buys less over time.

• Low returns — Cash usually produces lower long-term returns than equities, property and some bonds. This limits wealth growth.
• Interest rate risk — Savings rates can fall if the Bank of England base rate falls, so income from cash may reduce.
• Opportunity cost — Keeping too much money in cash may mean missing stock market growth, property appreciation and better long-term investments.

Risk level of cash

In CeMAP, cash is usually classified as the lowest-risk asset class.

• Cash — Lowest risk.
• Bonds — Low to medium risk.
• Property — Medium risk.
• Equities — Medium to high risk.

When cash is suitable

Cash may suit clients who:

• Need quick access to their money.
• Are risk-averse.
• Have short-term goals.
• Need emergency savings.
• Are saving for a house deposit.
• Cannot tolerate investment losses.

When cash may be unsuitable

Cash may be unsuitable for:

• Long-term growth objectives.
• Beating inflation.
• Retirement growth over decades.

Important CeMAP exam terms

• Liquidity — How quickly an asset can be converted into cash. Cash has very high liquidity.
• Inflation — General rise in prices over time, reducing purchasing power.