Motives for Holding Cash

There are three main motives for holding cash: transaction motive, precautionary motive, and speculative motive.

The transaction motive is the need to hold cash to conduct business in the ordinary course. This includes making payments for purchases, wages, operating expenses, and other payments.

The precautionary motive is the need to hold cash to meet unforeseen expenses. This includes unexpected expenses that may arise due to government policies, competition, natural calamities, or labor unrest.

The speculative motive is the need to hold cash to take advantage of unexpected opportunities. This includes opportunities to purchase raw materials at a reduced price or to buy securities at a time when their prices are low.