Short-term investments and how they workBy Michael Reed
There is always interest in short-term investments. Because there are many more people and companies with temporarily free funds than those ready to invest for a long time. There are many options for short-term investments. They are very different, and it is difficult to highlight common features, except for the investment period. But there are general trends.
Short-term investments: how do they work
Financial investment involves the purchase of intangible assets. For example, placing funds in a bank, mutual fund, microfinance organization, and purchasing shares in stock markets.
Relatively reliable and low-risk short-term investments are bank deposits and government treasuries. Profitability here is low and loses to inflation. On average, the investor’s income will be 2-4% per annum.
Another asset is that you can make money on can be stocks. A speculator needs to find undervalued securities and make a profit in a year. There are a lot of risks because even if it was possible to “calculate” the paper, it does not mean that it will be possible to earn decent money on it. The market is a rather complex mechanism, and many factors cancel out the profit.
Short-term investments are made by many professional investors, individuals, and companies engaged in other types of business. Each investor has its own goals, preferences, and opportunities.
- Non-professional private investors usually invest their own savings to receive additional passive income;
- Professional investors buy securities and obligations for their own or entrusted to them, actively resell them and earn on this;
- Manufacturing companies invest temporarily free money for the sake of additional income.
What is the difference between short-term investments?
In addition to the short investment period in an asset, such investments have one more fundamental difference.
Objects of short-term investments are always highly liquid assets. Something that can be bought and sold quickly and easily.
The object of short-term investments can only be mass products with uniform properties.
The current asset price for short-term investments can be accurately measured in money.
A good example of a short-term investment is buying a permanently traded bond. But the acquisition of suburban real estate will almost certainly not be a profitable short-term investment. Such an asset is sometimes bought and sold for a long time, and it is difficult to predict its future price.
How do you make money on short-term investments?
There are different options for short-term investments, but there are only two ways to make money on them.
- The simplest and most common option is buying an asset at one price and selling it at another. The lower the asset’s purchase price and the higher the sale price, the more profitable the investment.
- Another way to make money on short-term investment is the current income from it. However, not all investment assets promise current income.
Investments with current income from assets are usually made for the entire period of the investment. It would be correct to call them passive investments.
Short-term investment examples
- Certificates of Deposit (CDs) Certificates of Deposit, per year – 0.5-3% or more
- Money market account (MMA), Money market accounts, about 2%
- Treasury Securities, US Treasury Securities, 0.5% -2.5%
- Bond Funds, Bond Funds, 2.5-3%
- Municipal Bonds, Municipal bonds up to 4% or more
- Peer-to-Peer Lending (P2P), Equal Lending, usually up to 5%
- Online Savings Accounts, Online Savings Accounts 1-2%
- Online account rates are usually higher than traditional deposits.
- Exchange-traded funds (ETF), Exchange Traded Funds
Pros and cons of short-term investments
Short-term investments are too varied, so it is difficult to single out some common advantages and disadvantages.
More often than not, short-term investments are less profitable. If only because the profit is usually proportional to the duration of the investment. This is especially noticeable when reinvesting investment income when the money earned over the period is added to the primary investment.
There are fewer types of short-term investments than long-term ones. Some investment options in the short term do not work or are not profitable. It makes no sense to invest in real estate for a short time, in long-term bonds, in stocks with a stable exchange rate. It is usually not profitable to buy precious metals and currencies for a short time, except for periods of crises and high volatility.