Short-term investments are any type of investments that are anticipated to expire or be liquidated within the course of the next twelve-month period. Assets of this type may include bond issues or even stocks that the investor plans on retaining for a period of no longer than one year before trading for other investment options. In addition, any type of savings account that is set up for a specific purpose that is anticipated to be fulfilled within the next year can also considered a short-term investment.
Investors tend to look for short-term investments that will provide a significant return within a short period of time. The bond issue is a classic example. With many bond issues, the investor can earn a higher rate of interest over the short-term life of the bond than would be possible with most savings accounts. Upon maturity, the investor receives both the original investment in the bond, plus the accrued interest. This approach is ideal for anyone who is uncomfortable with volatile investment opportunities.
Corporations also tend to include short-term investments in their overall investment activity. This is particularly true with companies that have a strong cash position. Their investment strategy normally calls for a balance between long-term investments and short-term opportunities as a way to simultaneously generate a steady flow of income from investments that mature and yield a return over the next year, and investments that mature at later dates. This process calls for a constant rollover of investments as they reach maturity, often using a portion of the profits earned from the venture. The proceeds from the short-term investments may be used to cover shortfalls in revenue from sales, or used to fund capital improvements or expansions of the business.
Even for casual investors, savings that are set aside for a specific purpose may fall into the category of short-term investments. For example, an individual may establish a savings account for the purpose of accruing funds for an upcoming vacation. The funds are deposited regularly into the account, and earn a small rate of interest over the twelve-month period. At the end of that time, the funds are withdrawn and used to pay for the vacation or holiday, a strategy that allows the individual or family to enjoy the time without calling on funds that are normally used to maintain the household. As is true in many cases, this application of short-term investments allows the investor to reach a stated goal, without creating any type of stress or hardship on other financial obligations.