Long-Term V Short-Term Investments Short-Term

Long-term V Short-Term Investments

Short-Term V. Long-Term Investments

An investment can be defined as something that is worth buying in the present because it has the potential of being profitable or useful in the future. Investments can be divided into two different types: short-term investments and long-term investments. As such, each has their own advantages and disadvantages, which must be taken into consideration before choosing one and/or the other.

A short-term investment can be defined as "an account in the current assets section of a company's balance sheet. This account contains any investments that a company has made that will expire within one year" (Short-Term Investments, 2012). "Short-term investments are highly liquid cash-generating purchases made by a company to be held less than one year" (Short-Term Investments, n.d.). Examples of short-term investments include money market funds, certificates of deposit, and treasury bills (Short-Term Investments, n.d.). A money market account is similar to a savings account; however, they usually pay higher interest and require higher minimum balances (the ASPIRA Association, n.d., p. 20). A certificate of deposit is a deposit account offered by a financial institution that offer a higher interest rate than a typical savings account and is federally incurred for up to $250,000 (the ASPIRA Association, n.d., p. 23).

On the other hand, long-term investments, like short-term investments, are found on the assets side of a company's balance sheet, however these investments are those that a company intends to keep for more than one year (Long-Term Investments, 2012). These types of investments may include stocks and bonds, real estate, and cash. A stock is "a proportional interest of a corporation" (the ASPIRA Association, n.d., p. 31). Historically, stocks have shown to have the highest return of any asset; return on investment for stocks are about 10% (CNN Money, 2012). One of the biggest threats to long-term investments is inflation as often devalues an investment over time; historically, inflation devalues long-term investments 3.2% a year (CNN Money, 2012). Many times, long-term investments are assets that a company does not intend to sell.

Both short-term investments and long-term investments have advantages and disadvantages. One of the main advantages that short-term investments have is their potential for quick growth as they are only expected to last a couple of weeks to a few months. These types of investments allow a company to have more control over their money. On the downside, short-term investments carry a higher risk and have demonstrated a higher rate of fluctuation as compared to long-term investments (Mussi, 2007).