Short-term investments, also known as marketable securities or temporary investments, are investments that are expected to be converted into cash within one year or less. They are considered to be a type of current asset on a company’s balance sheet.
Short-term investments are typically made in highly liquid securities such as cash equivalents, money market instruments, and highly rated debt securities. They are made with the intention of earning a return on the investment while maintaining a low level of risk.
Short-term investments are often made to manage excess cash that a company has on hand and to ensure that the company has access to liquidity when it is needed. They are also made to take advantage of short-term market opportunities or to diversify the company’s investment portfolio.
Why marketable securities are important?
- Liquidity: Marketable securities are highly liquid, which means that they can be easily bought and sold on public markets. This allows companies to access cash quickly when it is needed.
- Risk management: Marketable securities are generally considered to be low-risk investments, as they are issued by highly creditworthy borrowers and are highly liquid. This makes them a good choice for companies looking to manage risk in their investment portfolios.
- Return on investment: While marketable securities may not offer the highest returns compared to other types of investments, they do offer a degree of stability and a predictable stream of income. This makes them a good choice for companies looking to generate a stable return on their investment.
- Diversification: Investing in marketable securities allows companies to diversify their investment portfolios and reduce their exposure to risk.
Some examples of marketable securities, also known as short-term investments:
Cash equivalents: Cash equivalents are highly liquid investments that are readily convertible into cash and have a short-term maturity. Examples of cash equivalents include treasury bills, commercial paper, and money market funds.
Money market instruments: Money market instruments are short-term, fixed-income securities with maturities of one year or less. Examples of money market instruments include certificates of deposit, banker’s acceptances, and repurchase agreements.
Highly rated debt securities: Highly rated debt securities are fixed-income securities that are issued by highly creditworthy borrowers. Examples of highly rated debt securities include government bonds, corporate bonds, and municipal bonds.
Stocks: Stocks, also known as equities, represent ownership in a company and entitle the holder to a share of the company’s profits. Stocks are considered to be marketable securities because they are easily bought and sold on public stock exchanges.