What are short-term investments of companies?

Short-term investments, also known as marketable securities or temporary investments, are financial investments that can be easily converted into cash, usually within five years. The objective of a short-term investment, for both companies and individual or institutional investors, is to protect capital while generating a return similar to that of a Treasury bill index fund or other similar benchmark index. Let's look in depth at what short-term investments of companies are. 

What are short-term investments of companies?

Short-term investments, also known as marketable securities or temporary investments, are financial investments that can be easily converted into cash, usually within five years. Many short-term investments are sold or converted into cash after a period of only three to twelve months. Some common examples of short-term investments are certificates of deposit, money market accounts, high-yield savings accounts, government bonds, and Treasury bills. Typically, these investments are high-quality, highly liquid assets or investment vehicles. Short-term investments can also refer specifically to financial assets (of a similar type, but with some 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, short-term investments in this context are investments that a company has made that are expected to be converted into cash within one year.

What are short-term investments of companies for?

The objective of a short-term investment, for both companies and individual or institutional investors, is to protect capital while generating a return similar to that of a Treasury bill index fund or other similar benchmark index. Companies with a strong cash position will have a short-term investment 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 would be earned from a regular savings account. There are two basic requirements for a company to classify an investment as short-term:

• First, it must be liquid, such as a frequently traded stock on a major exchange or U.S. Treasury bonds.
• Second, management must intend to sell the security within a relatively short term, such as 12 months. Marketable debt securities, also known as “short-term paper,” that mature in one year or less, such as Treasury bills and commercial paper, also count as short-term investments.

Types of short-term investments of companies

• Certificates of deposit (CD): These deposits are offered by banks and usually pay a higher interest rate because they tie up the cash for a certain period. These periods usually range from several months to five years. They are FDIC insured up to $250.000.
• Treasury bond: There are a wide variety of these bonds issued by the government, such as notes, bills, floating rate notes, and Treasury inflation-protected securities (TIPS).
• Bond funds: Offered by professional asset managers/investment firms, these funds are best for a shorter term and can offer above-average returns for the risk. You just have to take into account the commissions.
• 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 tax.
• Loans between individuals (P2P): Excess cash can be put into play through one of these lending platforms that match borrowers with lenders.

Advantages and disadvantages of having short-term investments

Advantages✔️	Disadvantages❌
Profits from short-term investments are reflected directly in the income statement.	Short-term investments typically have lower rates of return.
Short-term investments assume lower risk, making them stable options.	Any decline in the value of an investment in the short term will directly affect a company's net income.
Short-term investments help diversify income types, in case of market volatility.