Short Term Investments

 
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Short-Term Investments are highly liquid cash-generating purchases made by a company to be held for one year or less.

Short term investments are taken on by companies with a healthy cash situation: they have either a strong positive cash flow, substantial pre-existing cash reserves, or both. They are purchased as an alternative to storing the excess cash in bank accounts that will have lower interest rates (and thus lower cash returns).

A company's short term investments are tracked in the current assets section of a company's balance sheet.

Money market funds, a Certificate of Deposit (CD), and treasury bills (T-Bills) are all examples of short term investments.

Example

A company has an excess cash reserve after a profitable third quarter. The company then uses their profit to purchase a CD that matures in 6 months at a 6% interest rate as opposed to simply putting the cash in the bank and receiving a 2% return on cash. The CD is considered a short-term investment for the company.

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