Canto 2.1

Cash

This category of investments has very low risk of dropping in value, but doesn't rise much either. Because of the low risk, investments in this category don't pay much in the way of interest or dividends. In fact, sometimes a good savings account at an on-line bank will pay a higher rate of interest, so there is kind of a fuzzy line between this category of investment and your savings. Here are some of the things that fall in this category:

• Guaranteed Investment Certificates (in Canada) or Certificates of Deposit (in the U.S.), which you often get at a bank or credit union and which pay a fixed rate of interest for a specific term.
• Money market funds, which you can sometimes get through a bank or credit union, but also from mutual fund companies. These funds buy and sell short-term financial securities, like loans that last less than a year. Some are issued by governments (like treasury bills) and some are issued by companies (often called commercial paper). The direct trading in these securities is generally done by large institutions, such as from one bank to another. Individual investors generally participate by buying shares in a money market fund. The share value in a money market fund usually stays the same (in over 20 years of investing, using several different money market funds in Canada and the U.S., I've never seen the share value change in any of them). They pay dividends to the investor, usually once a month, based on the interest coming in from the securities the fund is buying and selling.

If you are trying to save for something that you're going to need money for in a short time - well under five years, for instance - you should mostly use cash type investments for that.

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