What Are Short-Term Investments?

Short-term investments, also known as marketable securities or temporary investments, are financial investments that can easily be converted to cash, typically within 5 years. Many short-term investments are sold or converted to cash after a period of only 3-12 months. Some common examples of short-term investments include CDs, money market accounts, high-yield savings accounts, government bonds, and Treasury bills. Usually, these investments are high-quality and highly liquid assets or investment vehicles.

How Short-Term Investments Work

The goal of a short-term investment—for both companies and individual or institutional investors—is to protect capital while also generating a return similar to a Treasury bill index fund or another similar benchmark.

Short-term investments may also refer specifically to financial assets—of a similar kind, but with a few additional requirements—that are owned by a company. Recorded in a separate account, and listed in the current assets section of the corporate balance sheet, short-term investments in this context are investments that a company has made that are expected to be converted into cash within one year.

Companies in a strong cash position will have a short-term investments account on their balance sheet. As a result, the company can afford to invest excess cash in stocks, bonds, or cash equivalents to earn higher interest than what would be earned from a normal savings account.

There are two basic requirements for a company to classify an investment as short-term. First, it must be liquid, like a stock listed on a major exchange that trades frequently or U.S. Treasury bonds. Second, the management must intend to sell the security within a relatively short period, such as 12 months. Marketable debt securities, aka "short-term paper," that mature within a year or less, such as U.S. Treasury bills and commercial paper, also count as short-term investments.

Marketable equity securities include investments in common and preferred stock. Marketable debt securities can include corporate bonds—that is, bonds issued by another company—but they also need to have short maturity dates and should be actively traded to be considered liquid.