What is Trading Below Cash?

The trading market is a complicated space with a lot of crucial points to address for people who want to make money. At first, it can feel as though the spikes and movements in various industries are almost entirely random – until you start to practice using a stock market simulator. Over time, you’ll gain a better understanding of the factors that influence your ability to make money, and how you can protect yourself against various forms of risk.

Before you get to that point, however, you’ll need to learn some of the common terms that can emerge when you’re looking for things to purchase. For instance, if you’ve been browsing market opportunities in the past and you’ve seen the term trading below cash, you might wonder what that really means, and how it affects you.

The Basics of Trading Below Cash

This term is a financial one used to describe a situation when the stock price indicates a market value lower than the current holdings that the company has in cash. Essentially, if the total share value of a company is less than the cash it has, minus any debts, then you’re trading below cash. Usually, this happens when the growth prospects for a company is somewhat poor.

Investors often value businesses in this way if they feel that the burn rate of the organization is too high for it to consistently sustain itself, or that there’s too much uncertainty around the cost of any liabilities that the organization might be taking on. Stocks that trade in this segment are usually not a good idea for people who aren’t open to a significant amount of risk. Although buying at this stage could be a helpful way to get in ahead of a massive spike of growth, there’s also a risk that prices will continue to trend downwards too.

Should You Invest in a Company Trading Below Cash?

So, if this designation often defines a company that’s not doing particularly well, should you ever invest your cash to something that’s trading below its value? Well, that depends on what you discover with the rest of your research. If a company is in the process of turning things around and getting back on track, then you might have a great chance to get in on the ground floor of some significant new opportunities.

Try and find information that can help you to determine if this solution has any potential for you in the short or long-term. Examining the market sentiment towards the brand and the economy that it’s growing in can be a good idea. You can also look at the movement of the industry in general, and whether that might affect any purchasing decisions. Additionally, don’t be afraid to examine the previous roles if the CEO or founder of the business in question. If that individual is responsible for generating a lot of growth, and they’ve turned other companies around before, this could be a good sign that they can pull of something impressive again.