What Are Short-Term Investments?

Short-term investments, also known as marketable securities or temporary investments, are those which can easily be converted to cash, typically within 5 years. Many short-term investments are sold or converted to cash after a period of only 3-12 months. Some common examples of short term investments include CDs, money market accounts, high-yield savings accounts, government bonds and Treasury bills. Usually, these investments are high-quality and highly liquid assets or investment vehicles.

Short-term investments may also refer specifically to financial assets—of a similar kind, but with a few additional requirements—that are owned by a company. Recorded in a separate account,
and listed in the current assets section of the corporate balance sheet, these are investments that a company has made that are expected to be converted into cash within one year.

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Short-Term Investments

How Short-Term Investments Work

The goal of a short-term investment—for both companies and individual/institutional investors—is to protect capital while also generating a return similar to a Treasury bill index fund or another similar benchmark.

Companies in a strong cash position will have a short-term investments account on their balance sheet. As a result, the company can afford to invest excess cash in stocks, bonds, or cash equivalents to earn higher interest than what would be earned from a normal savings account.

There are two basic requirements for a company to classify an investment as short-term. First, it must be liquid, like a stock listed on a major exchange that trades frequently or U.S. Treasury bonds. Second, the management must intend to sell the security within a relatively short period, such as 12 months. Marketable debt securities, aka "short-term paper," that mature within a year or less, such as U.S. Treasury bills and commercial paper, also count as short-term investments.

Marketable equity securities include investments in common and preferred stock. Marketable debt securities can include corporate bonds—that is, bonds issued by another company—but they also need to have short maturity dates and should be actively traded to be considered liquid.

Key Takeaways

  • Short-term investments are marketable securities or highly liquid assets designed to provide a safe, temporary parking place for excess cash.
  • Short-term investments can also refer to holdings a company owns but intends to sell within a year or (if debt) mature within a year.
  • CDs, money market accounts, and Treasury bills are common types of low-risk short-term investments.

Examples of Short-Term Investments

Some common short-term investments and strategies used by corporations and individual investors include:

  • Certificates of deposit (CDs): These deposits are offered by banks and typically pay a higher interest rate because they lock up cash for a given period. They are FDIC-insured up to $250,000.
  • Money market accounts: Returns on these FDIC-insured accounts will beat those on savings accounts, but require a minimum investment. Keep in mind that money market accounts differ from money market mutual funds, which are not FDIC-insured.
  • Treasuries: There are a variety of these government-issued bonds, such as notes, bills, floating-rate notes, and Treasury Inflation-Protected Securities (TIPS).
  • Bond funds: Offered by professional asset managers/investment companies, these funds are better for a shorter time frame and can offer better-than-average returns for the risk. Just be aware of the fees.
  •  Municipal bonds: These bonds, issued by local, state, or non-federal government agencies, can offer higher yields and tax advantages since they are often exempt from income taxes.
  • Peer-to-peer (P2P) lending: Excess cash can be put into play via one of these lending platforms that match borrowers to lenders.
  • Roth IRAs: For individuals, these vehicles can offer flexibility and a variety of investment options. Contributions, but not gains, to Roth IRAs can be withdrawn at any time, without penalty or taxes due.

If you have excess cash, using it to pay off higher-interest debt may be more advantageous than investing it in low-risk but low-return short-term investments.

Real-Life Example of Short-Term Investments

On its March 31, 2018, quarterly statement, Microsoft Corp. reported holding $135 billion of short-term investments on its balance sheet. The biggest component was U.S. government and agency securities, which was $108 billion. This was followed by corporate notes/bonds worth $6.1 billion, foreign government bonds worth $4.7 billion, mortgage/asset-backed securities at $3.8 billion, certificates of deposit (CDs) were worth $2 billion, and municipal securities at $269 million.

Apple Inc. also held short-term investments, listed as marketable securities, of $254 billion as of March 31, 2018. The two major investments were corporate securities, which represented $138 billion, and U.S. Treasury/agency securities, which were $62.3 billion. The company's investment in commercial paper was worth $17.4 billion and mutual funds were $800 million. Apple also had non-U.S. government securities of $8.2 billion and certificates/time deposits of $7.3 billion. Mortgage/asset-backed securities were at $20 billion and municipal securities at $973 million, rounded out its short-term investments.