Who do people prefer to hold money?
People hold money for various reasons. The reasons include the transaction motives which follows the daily need for cash to carry out a business and personal transaction. Also, the precautionary motive of holding money to secure future cash is equivalent to the proportion of the total resources.
For transactions People need money for day-to-day living, paying bills, making purchases, and ensuring they can cover their expenses. As a precaution People usually save money to ensure that they can cover emergency bills or costs, such as illness or unplanned repairs-related costs.
Transactions Demand for Money
The primary reason people hold money is because they expect to use it to buy something sometime soon. In other words, people expect to make transactions for goods or services. How much money a person holds onto should probably depend on the value of the transactions that are anticipated.
the transactions motive: people prefer to have liquidity to assure basic transactions, for their income is not constantly available. The amount of liquidity demanded is determined by the level of income: the higher the income, the more money demanded for carrying out increased spending.
The advantage of holding money (the medium of exchange) is that it can be used to buy goods, services, and financial assets. The disadvantage of holding money is that money earns little or no interest.
Liquid assets can be sold at or near their market value. Both individual and corporate investors and companies use liquid assets to preserve their net worth, stay afloat, protect their other assets, or as an emergency fund.
In general, liquid assets tend to come with fewer risks than nonliquid assets. Carrying at least some liquid assets in your portfolio means you always have access to a certain amount of cash value, even if markets change and the value of nonliquid assets drop substantially.
Cash is most liquid asset because it is used for buying and selling goods and services instantly without losing its own value.
Answer and Explanation:
Moreover, holding money may be advantageous since it enables a person to have readily available money, which may finance emergencies and unexpected expenses. However, it may be disadvantageous due to its poor returns prospects.
Even if you want to just preserve the value of your assets over the long term you will need to invest them, so only hold cash in addition to your emergency fund if you are going to spend it in, say, the next three years.
Why should investors hold cash?
Finally, investors will be happy to have some cash in their investment portfolios during a stock market crash. It will give them the funds to buy stocks or other assets during the decline. Because of how precious cash can be during times of financial stress, many have said that cash is king.
Liquid funds are ideal for low-risk investors looking to park surplus cash for the short term. The biggest advantage of liquid funds is that it offers superior returns than bank deposits. But the returns on liquid funds is not guaranteed. This is the biggest disadvantage of liquid funds.
If you have a higher number of liquid assets, you're also more likely to get better loan terms and interest rates — a must-have for startups. Non-liquid assets offer long-term gains that shouldn't be discounted either.
Liquidity provides financial flexibility. Having enough cash or easily tradable assets allows individuals and companies to respond quickly to unexpected expenses, emergencies or business opportunities. It allows them to balance their finances without being forced to sell long-term assets on unfavourable terms.
Answer and Explanation:
Liquidity on the current date is good but, excess liquidity leads to low returns in the future. 2. Increased risk: Lower returns can lead to increased risk.
To remain viable, a financial institution must have enough liquid assets to meet withdrawals by depositors and other near-term obligations. Capital is the difference between all of a firm's assets and its liabilities. Capital acts as a financial cushion to absorb losses.
Liquidity ratios have some disadvantages that limit their reliability and accuracy. For instance, they are based on historical data, which may not capture future changes or trends. Also, accounting policies and practices can affect the amount of inventory reported on the balance sheet and the quick ratio.
And cash is generally considered the most liquid asset. Cash in a bank account or credit union account can be accessed quickly and easily, via a bank transfer or an ATM withdrawal. Liquidity is important because owning liquid assets allows you to pay for basic living expenses and handle emergencies when they arise.
The high-quality liquid assets (HQLA) include only those with a high potential to be converted easily and quickly into cash (in times of distress). HQLA are cash or assets that can be converted into cash quickly through sales (or by being pledged as collateral) with no significant loss of value.
A company's liquidity indicates its ability to pay debt obligations, or current liabilities, without having to raise external capital or take out loans. High liquidity means that a company can easily meet its short-term debts while low liquidity implies the opposite and that a company could imminently face bankruptcy.
Why is holding cash bad?
In times like these when inflation is rising, it's smart to make sure you have enough-- but not too much-- cash on your balance sheet. Holding too much cash over the long term can be very detrimental. Because it's universally true that inflation erodes the true value of cash over time.
Aim for building the fund to three months of expenses, then splitting your savings between a savings account and investments until you have six to eight months' worth tucked away. After that, your savings should go into retirement and other goals—investing in something that earns more than a bank account.
Excess cash has three negative impacts: It lowers your return on assets. It increases your cost of capital. It increases business risk and destroys value while making the management overconfident.
They are rooted in psychological and behavioral deficiencies, such as lack of work ethic, lack of faith, lack of discipline, over-spending, excessive risk-taking in investments, greed, pride, and an insatiable desire to impress others.
For financial security, keep some cash in the bank. Double emphasis on some, because there are good reasons not to keep too much money in cash, too. Inflation decreases the value of any money you hold in cash. Inflation, aka rising prices over time, reduces your purchasing power.
