Cash equivalents are short-term, highly liquid financial instruments that are readily convertible to known amounts of cash and carry minimal risk. They typically have maturities of three months or less from the date of purchase.
Common examples include treasury bills, commercial paper, money market funds, and certificates of deposit. These instruments are considered almost as safe as cash because they can be quickly and easily converted to cash with little to no loss in value.
Cash equivalents play an important role in portfolio management by providing liquidity and stability. Companies and investors hold cash equivalents to meet short-term obligations while earning a small return on their idle funds.