What are Short-Term Investments?

Short-term investments are temporary investments or marketable securities designed to provide a safe harbor for cash while it awaits future deployment into higher-returning opportunities. A common time frame for cashing out of short-term investments is five years, though one-to-three years or even three-to-12 months is not uncommon for some investors and products.

For a company, short-term investments are part of the account in the current assets section of its balance sheet. This account contains any investments that a company has made that are expected to be converted into cash within one year. Short-term investments may also refer to the type of high-quality, high-liquidity investment used by individual or professional investors to temporarily store cash, usually benchmarked against a Treasury bill index.

1:22

Short-Term Investments

How Short-Term Investments Work

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. 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 of another similar benchmark.

Paying off higher-interest debt may be more advantageous than investing excess cash in low-risk, low-return short-term investments.

Requirements for Short-Term Investments

There are two basic requirements for a company to classify an investment as short-term. First, it must be liquid. Two examples are an equity listed on a major exchange that frequently trades is qualified and U.S. Treasury securities. Second, the management must intend to sell the security within a relatively short period, such as 12 months. A bond that matures within that time frame is also included.

Marketable equity securities include investments in common and preferred stock. An example of marketable debt securities is a bond in another company. These can be short-term and should be actively traded to be considered liquid. Short-term paper has original maturities that are less than 270 days, such as U.S. Treasury bills and commercial paper.

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 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 savings accounts but require a minimum investment. Keep in mind that money market mutual funds are not FDIC-insured. Accordingly, it's best to study up on these accounts.
  • 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, these strategies 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 a tax advantage.
  • 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.
  • Pay off debt: If you have higher-interest debt, consider paying it off before investing it again, especially when market conditions appear shaky. The 4.00% you save on paying off a loan may beat the 2.00% you earn on a deposit elsewhere.

Short-Term Investments in Practice

As of March 31, 2018, Microsoft Corp. held $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 $4.7 billion and mortgage/asset-backed securities at $3.8 billion. Certificates of deposit (CDs) were worth $2 billion and municipal securities at $269 million.

As far as Apple Inc., it 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.