Short-term investing means placing excess cash into various assets for a short time to make quick profits.
Short-term investors are people who
- aren’t risk-prone. They prefer to make a short-term investment and then withdraw money fast once the profit becomes tangible. They aren’t psychologically ready to be waiting for long, and they are often afraid of force majeure that can devalue their money.
- have a superficial knowledge of investing specifics, can’t assess risks and other relevant factors, or simply don’t have time for that.
- are emotional adventurers. They want to see quick, tangible results and are often fans of scalping, high-risk Pump & Dump strategies, pyramid schemes, and HYIP projects.
I’ll examine short-term investments and their pros and cons in this article. I’ll provide short-term investment examples and talk about the rules for reporting short-term investments on a balance sheet when forming or rebalancing an investment portfolio.
The article covers the following subjects:
What are short term investments?
There’s no common term for “short-term investments” because “short-term” will mean different periods for different asset groups. I would say that “short-term investments” means exploiting an investment idea or event that is supposed to happen in the near time and then withdrawing money from the asset. If a strategy implies exploiting a series of events regularly without withdrawing the investment, it can be called a medium-term strategy.
Investments are called “short-term” or “medium-term” based on how often the asset’s price changes amid some important events. A short-term strategy implies investing in highly liquid assets – current assets – that can be bought and sold with a minimal margin.
Here are some examples:
- In accounting, short-term investments refer to working assets used within one year. Long-term investments are over one year.
- In classical investing (bank deposits, government bonds, mutual funds), short-term investments refer to investing within one month.
- In Forex trading, short-term strategies imply opening trading within one day. They include scalping and intraday strategies.
There are two ways of earning from the best short-term investments: exploiting spreads – the difference between an asset’s buying and selling prices – and earning interest.
Short-term investment objectives:
- To protect free cash from inflation. For example, we can invest excess cash in deposits and government securities.
To earn money from a particular fundamental event. For example, buy Amazon stocks before a financial results publication and sell them after the quotes grow.
- To earn from active trading and minimize risks. Examples:
- Scalping. A price direction doesn’t matter to traders. They earn from any short-term move.
- Social Trading. An investor can copy a trader’s high-risk money-making signals and then close trades a bit earlier with moderate profits and lower risks.
- To gain some investing experience. Beginner investors don’t have to make long-term investments.
Top 10 best Short Term Investments types
Each of the following options can yield from 0.5% to 100% per annum or more in one day or in a few months. They all belong to short-term investments and are characterized by different risk levels.
Short-term investment options:
1. Short-term bank deposits, call deposits, high-yield savings accounts. One-week or one-month deposits that can be immediately withdrawn at a client’s request.
- Reliability. Fixed bank deposits are insured. In the USA, it’s Federal Deposit Insurance Corporation that underwrites bank deposits.
- Low entry threshold.