What Are Short-Term Investments?

What Are Short-Term Investments?

Let me explain short-term investments to you directly: these are financial assets you can easily turn into cash, usually within five years, and often much sooner, like three to twelve months. Think of them as marketable securities or temporary investments. Common ones include certificates of deposit (CDs), money market accounts, high-yield savings accounts, government bonds, and Treasury bills. These are typically high-quality and highly liquid, meaning you can access your money without much hassle.

In a company context, short-term investments refer to similar assets but with specific rules—they're recorded in a separate account on the balance sheet under current assets, and the company expects to convert them to cash within a year. You can contrast these with long-term investments, which are held for much longer periods.

Key Takeaways

Here's what you need to remember: short-term investments can mean holdings a company owns and plans to sell within a year. Examples you should know include CDs, money market accounts, high-yield savings accounts, government bonds, and Treasury bills. They generally offer lower returns but are highly liquid, giving you the option to withdraw funds quickly if necessary. For companies, any changes in their value show up directly on the income statement for that quarter.

How Short-Term Investments Work

Understand this: the main goal of short-term investments, whether for companies or individual investors like you, is to protect your capital while earning a return comparable to a Treasury bill index fund or similar benchmark. If a company has strong cash reserves, you'll see a short-term investments account on its balance sheet, allowing it to invest excess cash in stocks, bonds, or cash equivalents for better interest than a standard savings account.

For a company to classify something as short-term, it must meet two requirements: it has to be liquid, such as a frequently traded stock on a major exchange or U.S. Treasury bonds, and management must intend to sell it within a short period, like 12 months. This includes marketable debt securities like short-term paper, U.S. Treasury bills, and commercial paper that mature in a year or less. Marketable equity securities cover common and preferred stocks, while marketable debt securities include corporate bonds with short maturities that are actively traded for liquidity.

Short-Term Investments vs. Long-Term Investments

Let me draw a clear line for you: short-term investments are bought with the knowledge that they'll be sold quickly, unlike long-term ones, which you buy and hold for at least a year. Long-term investors like you might accept higher volatility and risk, betting that over time, the ups and downs will even out if the investment grows positively. Individuals often use long-term investments to save money they don't need immediately, such as for a car or house purchase.

Advantages and Disadvantages of Short-Term Investments

Short-term investments stabilize your portfolio, offering lower returns than long-term index funds but providing high liquidity so you can access money fast when needed. For businesses, long-term investments aren't income until sold, but short-term ones reflect price fluctuations at market rates, meaning declines get marked as losses on the income statement.

On the positive side, gains from short-term investments appear directly on the income statement, they carry lower risk for stability, and they help diversify income against market volatility. However, they usually yield lower returns, and any value drops directly hit a business's net income.

Real-World Example of Short-Term Investments

Take Microsoft Corp.'s quarterly statement from April 21, 2022: it reported $92.2 billion in short-term investments, mostly U.S. government securities at $78.4 billion, followed by corporate notes and bonds at $11.7 billion, mortgage/asset-backed securities at $590 million, foreign government bonds at $501 million, municipal securities at $269 million, and CDs at $2 billion. This shows how companies use these for excess cash.

What Are the Best Short-Term Investments?

You might ask about the best options: consider short-dated CDs, money market accounts, high-yield savings accounts, government bonds, and Treasury bills. Check current rates to see which fits you.

Where Can I Invest for 6 Months?

For a six-month horizon, look at six-month CDs, money market accounts, high-yield savings accounts, government bonds, and Treasury bills.

What Is the Best Way to Invest $5,000?

Analysts often suggest putting $5,000 into a mutual fund or ETF tracking the S&P 500 and holding it long-term, depending on your experience and risk tolerance.

What Can You Invest in With Little Money?

Even with small amounts, you have options like savings accounts without minimums, fractional shares in index funds, or affordable stocks, bonds, and CDs.

The Bottom Line

Short-term investments suit individuals and companies seeking liquid, stable ways to grow wealth. Options range from CDs to bonds and high-yield savings; it's up to you to research what works best.