What is a Short-Term Investment?

Mary McMahon
Mary McMahon

A short-term investment is an investment intended to be held for a year or less. Such investments are used as part of a mixed investment strategy that is designed to balance and spread risks. Profits may be realized through appreciation of the investment or through dividends and other payouts. Careful research can be conducted to make choices about investment decisions and people also can get advice from advisors and brokers if they do not feel comfortable choosing for themselves.

People with a mixed investment strategy can utilize short-term investments to provide a source of liquidity.
People with a mixed investment strategy can utilize short-term investments to provide a source of liquidity.

Some short-term investments are designed to mature in a year or less. The investments can be low or high risk, depending on their nature, and are often held by corporations that want to invest capital in highly liquid investments. If necessary, the short-term investment can be liquidated to access funds quickly, but otherwise, the company plans on making quick profits to generate more capital that can be used for further investment or other purposes.

Others can be held for longer than a year, but the investor is not choosing to take a long position. These investments are also highly liquid and may appreciate and generate dividends as long as they are held. At the end of the period designated for holding the short-term investment, it can be sold off or a reevaluation may determine that it should be kept longer. In either case, the performance on the short-term investment is usually above benchmark rate, providing an incentive for holding the investment.

Certain types of funds may operate primarily with short-term investments. Short-term investment funds (STIFs) concentrate capital in investments that are held over brief periods of time. The fund manager chooses low-risk investments in order to guarantee a base level of return that falls above the benchmark rate. Common choices for such funds include government securities, as these investments have guaranteed returns and are backed by the full faith and credit of the government.

People with a mixed investment strategy can utilize short-term investments to provide a source of liquidity and rapid returns that will sustain long positions on investments that will pay off in more than a year. This is designed to ensure that the long-term investments do not have to be sold off at a loss in the event that someone is in desperate need of capital or there is a sudden shift in the market. In addition to mixing short and long-term investments, investors also mix their buying decisions by type to obtain a broad spread, reducing the risk of losses in the event that part of the market declines.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a wiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

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