Dr. Loy has a Ph.D. in Resource Economics; master's degrees in economics, human resources, and safety; and has taught masters and doctorate level courses in statistics, research methods, economics, and management.
Learn more about short-term investments, their definition, time frames, and associated risk. Find out what defines an asset as liquid and what is classified as a short-term investment.
What Are Short-Term Investments?
Lana is an investor who specializes in money market accounts. Part of her investment portfolio includes accounts dedicated to the agriculture industry, specifically the wintering of cattle. Farmers purchase calves when they're young in the fall of the year (usually October). They feed them during fall, winter, and spring and sell them in April. This is six-month investment is considered a short-term investment. It should yield a return within a year, and that return is in cash. These are very low risk and have low returns.
A short-term investment is an investment that will mature to cash within a one-year time period and is considered liquid. When someone invests in short-term stock and bonds, the thinking is that these assets can be cashed in quickly. An asset is liquid if the owner can readily access it, and it has an established market where prices cannot be manipulated by one buyer or seller. The beef industry is an industry that does just this. The sellers have the ability to transfer ownership quickly, and buyers can't easily influence the market price of the calves.
Examples of investments that we are most familiar with in the short term are:
Certificates of deposit
which we'll take a closer look at now.
Examples of Short-Term Investments
Money markets are accounts that involve exchanges among financial institutions and companies, not individuals. Individuals are able to invest small amounts in money markets but can't directly trade them. They're usually for very large sums and mature quickly. Examples are treasury bills, municipal notes, and federal funds. Exchanges range from $5 million dollars to a billion dollars.
Savings accounts are low-risk deposit accounts held by a bank that provide the owner a small rate of interest.
Certificates of deposit, or CDs, are promissory notes from banks that have specific maturity dates and interest rates. Penalties are incurred when a note is accessed prior to the maturity date. Once mature, the certificate will be worth its principal and interest. Backed by banks, these are low-risk investments.
Treasury bills, or T-bills, are owed to the purchaser by the U.S. government. These mature in less than a year and range from $1,000 to $5 million dollars. When it matures, the T-bill includes the principal and interest. The longer the investment, the higher the interest rate. T-bills are often sold to raise money for government-funded infrastructure projects. Because the government backs these bills, they are very low risk.
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Government bonds are debts put forth by the government to fund its budget. Most are secured by the federal government and are considered low-risk. Any increase in interest rates will result in a loss of value in the bond.
Let's take a few moments to go over all that we learned here. Short-term investments are those investments that an owner can access quickly, have low risk, and will mature in the form of cash within a year. These are often used as a way to make a safe yet small return. An investment must be liquid to be short term. This means that prices can't be manipulated by one buyer or seller, and the asset is readily accessible.
Examples of short-term investments are:
Money markets, which are accounts that involve exchanges among financial institutions and companies, not individuals, and feature exchanges that range from $5 million dollars to a billion dollars.
Savings accounts, which are low-risk deposit accounts held by a bank that provide the owner a small rate of interest.
Certificates of deposit, or CDs, which are promissory notes from banks that have specific maturity dates and interest rates.
Treasury bills, or T-bills, which are owed to the purchaser by the U.S. government.
Government bonds, which are debts put forth by the government to fund its budget.
Each has slightly different characteristics, but all typically provide a small return that includes the principal and interest once the instrument matures.
Making a Dollar
There are many ways for investors to make a profit from their investments. One of the quickest ways, with little risk, is short-term investment. Utilizing short-term investments, investors can make a small return on their principle that they can take with them.
After reviewing this lesson, you should be able to define short-term investment and give examples.
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