Cash equity is all about understanding the current status of an investment portfolio. Essentially, it is the net worth of all cash that could be derived from the investments and securities that are included in the portfolio. Monitoring the cash equity is a great way to make sure that the current mix of investments is working, as well as a good strategy in determining what to keep and what to sell.
Calculating the cash equity is a simple process. First, compile a list of all debits that are associated with the financial portfolio. Once this list is complete, make a second list that notes each credit that is current associated with some item in the portfolio. Subtracting the credits from the debits will result in determining the overall cash equity of the current set of investments.
Along with using this formula to monitor the cash equity of the portfolio in general, the same approach can be applied to individual assets within the current roster of events. By considering each asset and evaluating the ratio between any credits and debits that apply, it is possible to decide if hanging on to the asset is a good idea, or if it is time to sell. This approach will help to keep the overall strength of the investment portfolio as healthy as possible.
It is important to realize that just about any set of investments will have a mixture of active debits and credits at any given time. The new investor should not be alarmed by the presence of debits. However, if the equity indicates that there are more debits involved with the current investments than there are credits, it is obvious that some changes are in order.
Cash equity can be applied in other financial strategies as well. For example, the basic formula for calculating it also lends itself well to looking at the financial health of a company before choosing to invest in the corporation. If the corporation does not maintain a healthy ratio between the debits and credits between investments, then choosing to invest resources in the company is probably not a good idea.
