Short Term Investments

What are Short Term Investments?

A short-term investment is a highly liquid financial asset meaning it can be easily converted to cash. Short-term investments are commonly called marketable securities or termporary investments. Most are converted to cash, or sold, within 12 months of the investment being made.

They are not typically part of a businesses’ operations. The aim of a short-term investment is to generate additional returns on a company’s cash balances, whilst preserving capital.

Key Learning Points

• Short term investments are highly liquid financial assets with the aim of generating additional returns on cash balances and preserving the principal
• There are many types of short term investments available and are all available to purchase over the primary and secondary market
• Short term investments are classified as current assets and are reported in the balance sheet
• Short term investments are highly liquid and for the purposes of valuation are treated as cash equivalents; they have applications in liquidity metrics and the calculation of net debt
• There are strict rules under IFRS for the treatment of short term investments as cash and cash equivalents; if they meet certain criteria they will either be reported under cash and cash equivalents or on a separate line as short term investments

Types of Short-term Investments

Certificate of Deposit (CD)

A certificate of deposit is a time-based deposit sold as a financial product by banks and savings institutions. They differ from savings accounts in that they have a fixed term, and usually a fixed interest rate.

Money Market Account

A money market account, sometimes called a money market deposit account, is similar to a CD but pays interest based on current interest rates in the money markets, rather than a fixed interest rate.

Treasury Bonds

A debt instrument issued by the US government with the promise the repay the full amount at a specified date with interest. There are many types available with a range of matrurities, including T-bills, T-notes, STRIPS and TIPS.

Peer-to-Peer Lending

Peer-to-peer lending, also abbreviated to P2P, is the practice of lending money to another individual or business, usually through an online broker or service. As a short term investment, the investor would expect a good return on their money in a short space of time, so it could still be classified as short-term.

Municipal Bonds

Municipal bonds, commonly known as “munis”, are debt securities issued by a local government or territory, or one of their agencies. They are generally used to fund public projects, such as infrastructure, schools, parks and libraries. They could be considered a loan from the investor to the government agency.

Reporting Investments on the Balance Sheet

Amazon.com Inc has significant investments in marketable securities. They are reported separately to cash and cash equivalents as they are not subject to an insignificant risk of change in value. Below is a segment from their consolidated balance sheet showing that the group had almost $19bn in marketable securities at the end of the 2019 financial year.

Current assets are always listed in order of liquidity, with the most liquid at the top, and least liquid at the bottom. Marketable securities can be more readily converted to cash than inventories or accounts receivable, therefore, are reported above them.

Amazon also recognizes in its annual report that there is a foreign exchange risk in investing in marketable securities, as many of the securities are held by its subsidiaries in other countries, so are in other currencies.

It’s important to remember that all investing activity carries an element of risk, be it foreign exchange risk, interest rate risk, or operational risk.