Focusing on the Short Term

Short term, when used in the financial sense, usually means one year or less. There are two ways to think of short term investment. The first is in an institutional sense. Institutionally speaking a short term investment  includes any of the listed assets on a companies current assets section of their balance sheet. These investments include any asset that will mature/expire within one year. Mostly these assets are highly liquid and can be converted to cash quickly if need be. Short term investments for an individual share the same idea that the asset will mature/expire within one year. These assets can include bonds, notes receivable and any other asset that is easily liquidated.

When a company is “cash rich” it tends to make many short term investments. These investments are due to mature within the current year. For example, Microsoft is a cash rich company with a large relative reserve of cash. Microsoft often invests this cash in short term investments in order to maximize their return on their cash reserves. One crucial element of these investments is liquidity. Another important element to the investments companies make with their current cash reserves is a low amount of risk.

It is utterly crucial that companies have access to their cash reserves in case of emergency. Should an event come up requiring access to the companies cash, the company does not want to have to wait a long time to liquidate their asset. When making investments with cash reserves companies tend to make very low risk investments. This is because investing their cash is not their main business. It is merely a way of making the money they have already made work for them.

Individuals can make short term investments in things such as treasury bonds, stock, mutual funds, and many other investments. Some short term investments can be thought of as speculation, or higher risk investments due to the volatility the short term can bring. Individuals must watch out for this volatility.