Short-term investments
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Short-term investments are financial instruments with an intended holding period of one year or less. They are typically liquid, low-risk, and relatively low-return investments. Common examples of short-term investments include:
- Money market funds: A money market fund is an investment fund that invests in short-term debt securities such as Treasury bills, commercial paper, and certificates of deposit. Money market funds are low-risk, liquid investments that have the potential to yield a higher return than traditional bank savings accounts.
- Treasury bills: Treasury bills are short-term, zero-coupon debt securities issued by the U.S. government with maturities of one year or less. They are sold in denominations of $1,000 and are highly liquid investments with low risk and low returns.
- Certificates of deposit: Certificates of deposit are bank deposits that are issued with a fixed maturity and interest rate. They are FDIC insured and can be used for short-term investments with maturities ranging from a few weeks to several years.
Example of Short-term investments
Short-term investments include a variety of investment instruments that are intended to be held for one year or less. These investments typically offer low risk and low returns, but they can provide a steady stream of income while preserving capital. Common examples of short-term investments include money market funds, Treasury bills, and certificates of deposit.
Money market funds invest in short-term debt securities such as Treasury bills, commercial paper, and certificates of deposit. They offer low-risk, liquid investments that have the potential to yield a higher return than traditional bank savings accounts. Treasury bills are zero-coupon debt securities issued by the U.S. government with maturities of one year or less. Certificates of deposit are bank deposits that are issued with a fixed maturity and interest rate. They are FDIC insured and can be used for short-term investments with maturities ranging from a few weeks to several years.
When to use Short-term investments
Short-term investments are best suited for investors who want to invest their money for a short period of time while minimizing risk and maximizing liquidity. They can be used to help manage cash flow and to earn a higher return than a typical bank savings account. Short-term investments are also suitable for investors who need to access their money quickly and are not concerned about long-term returns.
For example, if an investor needs to access their money in a year or less, they may choose to invest in a money market fund, Treasury bill, or certificate of deposit. These types of investments are ideal for investors who want to preserve their capital and earn a higher return than a bank savings account.
Types of Short-term investments
Short-term investments are a type of financial instrument with a low risk and low return that can be held for one year or less. Common types of short-term investments include:
- Money market funds: Money market funds are an investment fund that invests in short-term debt securities such as Treasury bills, commercial paper, and certificates of deposit. They are low-risk, liquid investments that have the potential to yield a higher return than traditional bank savings accounts.
- Treasury bills: Treasury bills are short-term, zero-coupon debt securities issued by the U.S. government with maturities of one year or less. They are sold in denominations of $1,000 and are highly liquid investments with low risk and low returns.
- Certificates of deposit: Certificates of deposit are bank deposits that are issued with a fixed maturity and interest rate. They are FDIC insured and can be used for short-term investments with maturities ranging from a few weeks to several years.
Steps of Short-term investments
The steps of short-term investments involve a few simple steps: selecting the appropriate instrument, understanding the risks and rewards of the investment, selecting the right time frame for the investment, and executing the trade.
- Selecting the appropriate instrument: The first step in investing in short-term investments is to select the appropriate instrument. This means researching the different types of instruments available and their associated risks and rewards.
- Understanding the risks and rewards: The next step is to understand the risks and rewards associated with the investment. This includes understanding the interest rate, fees, and maturity of the instrument.
- Selecting the right time frame: The third step is to select the right time frame for the investment. This means understanding the amount of time needed to achieve the desired return.
- Executing the trade: Finally, the last step is to execute the trade. This means executing the trade with the broker or financial institution in order to buy or sell the instrument.
Advantages of Short-term investments
Short-term investments offer a number of advantages to investors, such as:
- Liquidity: Short-term investments are highly liquid, meaning they can be easily converted into cash.
- Low risk: Short-term investments generally carry less risk than long-term investments, as they are typically backed by government securities or insured by the FDIC.
- Low cost: Short-term investments are typically less expensive than long-term investments.
- Tax efficiency: Short-term investments are generally more tax efficient than long-term investments, as they are not subject to capital gains taxes until they are held for more than one year.
Limitations of Short-term investments
- Liquidity risk: Short-term investments are typically liquid, but they may be subject to liquidity risk due to the potential lack of buyers or sellers in the market. If this occurs, it may be difficult to convert the investment into cash.
- Interest rate risk: Short-term investments are subject to interest rate risk due to the potential for changes in interest rates. If interest rates fall, the value of the investment may decline.
Short-term investments can also be seen as a way to hedge against market volatility, as they provide a safe haven for investors in times of market turmoil. Other strategies associated with short-term investments include dollar-cost averaging, where an investor invests a fixed amount of money over a period of time, and trading strategies such as arbitrage, which involve taking advantage of price discrepancies between different markets.
Suggested literature
- Cremers, M., Pareek, A., & Sautner, Z. (2017). Short-term investors, long-term investments, and firm value. Recuperado el, 15, 39.
- Von Thadden, E. L. (1995). Long-term contracts, short-term investment and monitoring. The Review of Economic Studies, 62(4), 557-575.
