Short-term investments are also known as temporary investments or marketable securities. Regardless of the term, they are financial investments that will give you good cash results in no more than five years.
Some can give you returns in 3 to 12 months; some examples are high-yield savings accounts, CDs, money market accounts, treasury bills, and government bonds.
Other simple examples of a short-term investment
A short-term investment is a simple and quick transaction that will yield you cash benefits in a short period. For example, you can buy shares in the stock market; their return will depend on the market’s volatility.
But being a short-term investment, you will wait for the right moment when you can make a profit; you will sell them at a higher price than you bought them at the right time. You will complete that transaction in no more than five years.
Another example is cryptocurrencies; you can invest in them with the lowest value you find in the market, trusting that in a few months, their value will increase; when you get the desired profits, you can sell them and recover your investment along with the profits.
If you invest with cryptocurrencies, you should pay more attention to volatility; the price varies from one day to another; when it is at its highest point would be the time to withdraw your profit to avoid losses due to the unexpected fall of the currency.
How short-term investments work
For both companies and individual investors, the mission of a short-term investment is to protect capital while generating a return similar to that of a Treasury bill index fund.
When companies have a strong cash position, they always have a short-term investment account on their balance sheet. It is an option that gives you the benefit of investing excess cash in bonds, stocks, or cash equivalents that will help you earn higher interest than you would with a conventional savings account.
For a company to qualify as a short-term investment, it must be liquid. It must also have management intending to sell the security within 12 months.
How to make short-term investments today?
There are different ways in which you can start with a short-term investment; the idea is to find the one that best suits your requirements and knowledge:
Acquire a high-yield savings account
Obtained at a bank or credit union, it is an effective solution to have earnings in a checking account; with this option, generally, the interest payment is low. It’s essential to evaluate the different banks to find the ones with the highest interest rates.
If you like this idea, it is an investment with no risk of losing money, but it is not profitable because you may start having trouble catching up with inflation. A savings account has good liquidity and is ideal for adding money to your account.
Although, most won’t accept more than six withdrawals or transfers without starting to charge statement cycle fees.
Money Market Accounts
Money market accounts have a higher interest payment than conventional savings accounts, but the minimum investment also increases. It is essential to find an FDIC-insured option to protect the fund against money loss to make the right choice.
Its biggest risk is time; having low-interest rates will make it difficult for you to keep up with inflation. It is ideal only for your short-term benefits, although you should be aware of federal laws because they have restrictions regarding withdrawals.
Short-term corporate bond funds
Corporate bonds are another example of short-term investments that companies offer to finance their acquisition. They are also very safe, and interest is paid at regular intervals (quarterly or twice a year).
You should know that the government does not insure them, meaning the chances of losing your money are high. Security is usually high when choosing the right ones, especially when acquiring a diversified collection.
Penalty-free certificates of deposit
To avoid traditional bank fees when canceling your CD before its maturity date, you can find penalty-free certificates of deposit at your bank. It is almost always offered at a higher yield than other bank products.
Purchasing a CD is a term deposit, so you have to understand that you agree to keep the money for a specific period in the account by opening it. It can be a few weeks or a few years; it depends on the maturity date you decide.
The risks with this product are low; you will not have to worry about losing the money; the risk would be missing out on a better interest rate in another product by having your money tied up in the CD. In addition, it is a less liquid option.
It would help if you also were wary of very low-interest rates, which can cause you to lose purchasing power due to inflation. Of all the examples, this is the one least preferred by investors.