What Are Short-Term Investments?
Short-term investments, sometimes called marketable securities or temporary investments, are financial products designed for quick and easy conversion into cash—usually within five years. Most short-term investments are realized in as fast as three to twelve months. Some popular examples include Certificates of Deposit (CDs), money market accounts, high-yield savings accounts, government bonds, and Treasury bills. Typically, these investments are high-quality, highly liquid assets.
When speaking about companies, short-term investments specifically refer to financial assets expected to be converted into cash within a year, recorded separately in the company’s balance sheet under current assets.
Short-term investments sharply contrast with long-term investments.
Key Insights
- Short-term investments are financial instruments that can be easily converted into cash, usually within five years.
- Companies list short-term investments they intend to sell within one year as current assets in their balance sheets.
- Common examples include CDs, money market accounts, high-yield savings accounts, government bonds, and Treasury bills.
- Though short-term investments offer lower returns, they are highly liquid, providing the flexibility of quick withdrawals.
- Changes in the value of a company’s short-term investments are reflected in their quarterly income statements.
Protecting Your Wealth: How Short-Term Investments Work
For both businesses and individual investors, the primary goal of a short-term investment is to protect capital while earning a reasonable return, similar to a Treasury bill index fund. Companies with a strong cash position can benefit by investing excess funds in stocks, bonds, or cash equivalents to gain better interest rates than standard savings accounts.
To classify an investment as short-term, a company must ensure the following:
- The investment must be liquid, such as frequently traded stocks or U.S. Treasury bonds.
- The company’s management intends to sell the security within a short period, generally within twelve months.
Short-term paper like U.S. Treasury bills maturing within a year and marketable debt securities like commercial paper also qualify as short-term investments. Short-term equity securities include investments in common and preferred stocks, provided they meet liquidity requirements.
Short-Term vs. Long-Term Investments
Unlike long-term investments intended to be held for at least a year, short-term investments are meant to be quickly sold. Long-term investors accept higher levels of risk and volatility for potential long-term growth, whereas short-term investors prioritize liquidity, stability, and immediate returns.
Benefits and Drawbacks
Short-term investments stabilize an investor’s portfolio. While they generally yield lower returns than long-term strategies, their liquidity allows for quick access to funds as needed. Businesses must note that while long-term investments are only considered income once sold, any market gains or losses in value of short-term investments are reflected immediately in the company’s income statement.
Pros:
- Immediate reflection of gains on the income statement.
- Minimal risks associated with liquidity.
- Acts as a hedge against market volatility by diversifying income types.
Cons:
- Lower rates of return compared to long-term investments.
- Any loss in value directly impacts the company’s net income.
Examples of Short-Term Investments
Common short-term investment vehicles for both individuals and corporations include:
- Certificates of Deposit (CDs): Provided by banks and typically offering higher interest for locking up funds for periods from a few months to five years. FDIC-insured up to $250,000.
- Money market accounts: Offers better returns than savings accounts and comes FDIC-insured but requires a minimum investment. Not to be confused with non-insured money market mutual funds.
- Treasuries: Variety in government-issued bonds like Treasury bills, notes, floating-rate notes, and Treasury Inflation-Protected Securities (TIPS).
- Bond funds: Managed by investment companies, ideal for short-term and frequently yield higher returns than traditional options. Awareness of management fees is crucial.
- Municipal bonds: Issued by local or state governments, offer higher yields and tax advantages.
- Peer-to-Peer (P2P) lending: Uses digital platforms to connect borrowers with lenders, optimizing excess cash.
- Roth IRAs: Provide flexibility and diverse investment options, from which contributions can be withdrawn anytime without penalties or taxes.
For individuals with surplus cash, paying off high-interest debts instead of investing in low-return short-term assets may often be a wiser choice.
Real-World Example: Microsoft Corp.
As of Apr. 21, 2022, Microsoft Corp. reported holding $92.2 billion in short-term investments on its balance sheet. This comprised mainly U.S. government securities ($78.4 billion), corporate notes/bonds ($11.7 billion), mortgage/asset-backed securities ($590 million), foreign government bonds ($501 million), municipal securities ($269 million), and CDs ($2 billion).
Finding the Best Short-Term Investments
Some of the best options include short-dated CDs, money market accounts, high-yield savings accounts, government bonds, and Treasury bills. Review their current interest rates to identify the best fit.
Ideal Short-Term Investment for 6 Months
Six-month CDs, money market accounts, high-yield savings accounts, government bonds, and Treasury bills are suitable for short-term investments within a six-month horizon.
Best Ways to Invest $5,000
Your ideal investment depends on your risk tolerance and investment experience. Many financial analysts suggest placing it in a mutual or exchange-traded fund tracking the S&P 500 for long-term wealth growth.
Investing With Low Cash Available
Even with limited funds, you have various options including savings accounts with no minimum balance, fractional shares of index funds, or affordable stocks, bonds, and CDs.
Final Thoughts
Short-term investments represent a smart choice for those seeking stable yet liquid investment vehicles. By exploring options like CDs, bonds, and high-yield savings accounts, investors can tailor their short-term investment strategy to fit their specific financial goals and needs.
Related Terms: investments, financial planning, high liquidity, corporate balance sheet, investment vehicles.
References
- Financial Industry Regulatory Authority. “Set a Time Frame for Your Financial Goals”.
- Internal Revenue Service. “Topic No. 409 Capital Gains and Losses”.
- U.S. Securities and Exchange Commission. “What Are Corporate Bonds?”, Page 4.
- Internal Revenue Service. “Publication 550: Investment Income and Expenses (Including Capital Gains and Losses)”, Pages 53.
- U.S. Securities and Exchange Commission. “Financial Navigating in the Current Economy: Ten Things to Consider Before You Make Investing Decisions”.
- Financial Industry Regulatory Authority. “Evaluating Investment Performance”.
- Internal Revenue Service. “Publication 550: Investment Income and Expenses (Including Capital Gains and Losses)”, Pages 20-21.
- Federal Deposit Insurance Corporation. “Deposit Insurance: Your Insured Deposits”.
- Internal Revenue Service. “Publication 550: Investment Income and Expenses (Including Capital Gains and Losses)”, Page 20.
- Consumer Financial Protection Bureau. “Is a Money Market Account Insured?”
- TreasuryDirect. “Treasury Inflation-Protected Securities (TIPS)”.
- U.S. Securities and Exchange Commission. “Mutual Funds and Exchange-Traded Funds (ETFs) – A Guide for Investors”.
- Internal Revenue Service. “Publication 550: Investment Income and Expenses (Including Capital Gains and Losses)”, Page 16.
- Moneysmart. “Peer to Peer Lending”.
- Internal Revenue Service. “Publication 590-B: Distributions From Individual Retirement Arrangements (IRAs)”, Page 7.
- U.S. Securities and Exchange Commission. “Answers to Test Your Money Smarts”, Page 2.
- Microsoft. “Form 10-Q”, Page 12.
