Quora Answer: Is It a Good Idea for a Small Business to Invest Some of Their Reserves into Stocks?

The following is my answer to a Quora question: “Is it a good idea for a no-debt small business with a healthy balance sheet to invest a portion of their cash reserves into individual stocks?” 

If you are a small business, it means that you have a relatively limited revenue.  The idea of investing a portion of your cash reserves is sound.  This is because keeping it in the bank means your holdings will eventually decrease in value due to inflation.  On the other hand, you need those investments to be relatively liquid in case there are unforeseen expenses.  The concern with inflation also precludes any form of debt instrument.  That leaves equity. 

However, putting it in individual stocks is a risk.  You are tying the value of your investments to the performance of individual counters on the market, subject to all the risk exposure that individual stocks bring.  You likely do not have enough to meaningfully diversity those holdings.  What you need is an investment that is liquid, sufficiently diversified to mitigate risk exposure, and gives a return that is above inflation.  It would be more reasonable to invest in some form of index fund or mutual fund.  That fulfills all the conditions.