Short-Term Investment

A short-term investment (also known as a temporary investment or marketable security), is a security that is expected to be sold within 3 to 12 months. Simply put, it is an equity or bond security that is expected to be held over a short time and sold to bring quick returns within 3 to 12 months. Short-term investments are commonly made up of short-term bonds, Treasury bills, and other money market funds.

Short-Term Investments Explained

Short-term investments are reported on the ‘current asset’ section of a company’s balance sheet. They are often grouped with the cash and cash equivalents categories considering the fact that many buyers and potential buyers easily convert securities to cash.

Short-term investments are characterized by their ability to readily and quickly convert securities to cash within a short time. Any security that cannot be readily converted to cash is not a marketable security. Therefore, investments held in obscurity in private companies cannot be classified as short-term investments.

Short term investments can also be characterized by the management’s willingness to convert or sell securities within 3 to 12 months. This decision is up to the management, as they can decide to hold on to an investment for a little longer if the market declines. By so doing, a company is able to convert a short-term investment into a long-term investment. This creates a gray area in the classification of short-term investments.

Advantages of Short-Term Investing

• Investors can make significant profits within a short period of time

• It offers investors with flexibility advantages such that they do not need to hold a security until maturity before reaping its profits or getting cash. Though long-term investments can also be liquidated on secondary markets, investors would be subject to lower profits compared to short-term investments.

• It allows investors to put in lower amounts of money as money invested per transaction

Disadvantages of Short-Term Investing

• It is subject to high market volatility.

• High commission costs

• No tax benefits

• Investors must possess a level of expertise in day trading, to be able to monitor price movements and identify sale spots.