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Highlights
- Highly liquid financial investments that can be easily converted into cash are known as short-term investments.
- Short-term investments are also known as marketable securities or temporary investments.
- Such investments include corporate deposits, money market accounts, high-yield savings accounts, government bonds, and Treasury bills.
Highly liquid financial investments that can be easily converted into cash are known as short-term investments. Also known as marketable securities or temporary investments, short-term investments can be typically converted into cash within 5 years, while some may even be converted in only 3 to 12 months.
Such investments include corporate deposits, money market accounts, high-yield savings accounts, government bonds, and Treasury bills. In addition, short-term investments can also refer to a company’s holdings that it intends to sell within a year.
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How do short-term investments work?
A short-term investment aims to protect capital both companies and individual or institutional investors. In addition to protect capital, it also seeks to generate a return similar to a Treasury bill index fund or some other benchmark.
In case of companies, an investment classifies as a short-term investment if it fulfils basic requirements. First, it should be liquid such as a frequently traded stock on an exchange and second is that the company should be able to sell the security within a short period of maybe 12 months.
How short-term investments differ from long-term investments
While short-term investments are held for a short period, long-term investments are held for at least one year. Long-term investments are generally made by investors who don’t require money on an urgent basis. These investors are willing to accept higher risks since volatility tends to increase over the long term.
Advantages of short-term investments
- Even as they offer lower interest rates, they are highly liquid in nature.
- Short-term investments carry relatively lower risk.
- In case of volatility, these investments provide options for diversification.
Disadvantages of short-term investments
- These investments give a lower rate of returns.
- Any fall in their value can impact the net income of a business.
Bottom Line
Short-term investments provide good options to investors and companies looking for liquid, less risky and stable investment options. However, investors should choose the option after carefully studying the pros and cons of such types of investments, along with their risk appetite.
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