Short-Term Investments. MarketCheese

Short-term investments are temporary investments that may be converted to cash. The period after which an investment is converted may vary, some are converted after three months, some become cash after months to five years. However, the most conversion happens between three-twelve month. Such investments are regarded as high-quality and highly liquid assets.

In some cases, short-term investment may be the concrete financial assets of a company. In such a case, they are of similar type, however, with the additional requirement or requirements. It must be investments that aren’t converted yet, but according to an unspoken rule, they are to be converted to cash within the current year. It applies to investments, which are stated in a separate account, etc.

Money market accounts, government bonds, government debt obligations may be considered as examples of such investments with smaller periods of holding. There is an opposite concept of short-term investments, which is known as long-term investments. Short-term investments may be called marketable securities as well. The other synonymous term is temporary investments.

Main principles of Short-Term Investments

It’s important not only to keep the capital but also to make it grow, i.e. to generate decent returns. Decent returns are similar to a benchmark that a company considers appropriate. For these reasons, companies and investors are highly interested in short-term investments. Such kind of investments perfectly do both, protect capital and generate returns.

Companies that have large cash definitely have special accounts for investments with smaller periods of holding. It allows such companies not only to maintain stability, but to invest cash money that is extra in bonds, stocks, etc. With big interests, more money comes to companies. Thus, it’s rather effective to invest excesses than to put it into a savings account.

Generally, there are two main conditions that an investment must meet in order to be classified as short-term. The first one is to be liquid. It means that this particular investment must be similar to a stock, which is often listed in a large exchange. The second condition is that the investment must be sold in twelve months. To prove meeting of this condition, the sell intention of management must be clear enough. Note that U.S. Treasury bills and commercial paper are regarded as short-term investments as well.

Difference between Short-Term Investments and long-term investments

Aside from the main difference (which is the period, long-term investments are supposed to be sold at least after a year of holding) between these two kinds of investments there are less clear differences, they are presented below:

Level of volatility and risk. Long-term investments are widely known for their unpredictable risk and volatility. However, it can’t stop investors from purchasing them. On the contrary, it’s believed that later such investments will bring higher returns.
Usage. Short-term investments are used by companies or individuals in order to get returns in a short period of time, while long-term ones are frequently used by individuals in order to stow money away, in case these individuals don’t intend to use the money right now.

Benefits of Short-Term Investments

There are several reasons why companies and individuals are interested in short-term investments, they may be seen below:

High liquidity. In case an investor is in extreme need of money, it’s easy to convert it into cash.
Low risk. Choosing short-term investments, an investor chooses a stable option.
Diversification. If there is market volatility, short-term investments help to make the range or investment’s types wider.

Drawbacks of Short-Term Investments

Short-term investments have disadvantages as well. Here are some of them:

Lower returns. Since short-term investments involve rather lower risks, they also bring fewer returns to their holders compared to long-term ones.
High susceptibility. Business is susceptible to changes in price of short-term investments, especially to such a change as decline. Thus, businessmen must be extremely careful with them.

Types of Short-Term investments

There are several types of investments that may be regarded as short-term investment instrument, they comprise:

Bond funds. Such funds are the perfect choice in case it’s selected by professional asset managers. However, the information about fees must be always kept in mind.
Money market accounts. Investments made with use of this tool can make returns higher.
Municipal bonds. In most cases, such bonds aren’t subject to income taxes. Moreover, municipal bonds imply larger yields and beneficial tax terms.
Certificate of deposit. These are temporary deposits. The period of holding may vary from a couple of months to 5 years. Since a person’s cash is locked up for a particular period, such deposits are known for the higher interest.
Peer-to-peer lending. In such a case, an individual or company doesn’t need a traditional bank. A borrower and a lender meet at the special platform, where deals take place. Thus, in case an individual or company has excess cash, such platforms may be of use.
Government bonds. Investing in such bonds may become an advantageous choice as well.

Note, that sometimes if there is excess cash it’s better not to put into short-term investments, but to pay off the debt with higher interests.