When people think of the word “investment,” they usually think about a long-term commitment of their time and resources: the interest-bearing retirement account, or a safe, extended investment in a blue-chip company.
But investment doesn’t have to cover a long, seemingly endless period. Plenty of modern investors have achieved success in short-term investments that can turn higher, more liquid profits than long-term ones.
How does it work? What’s the best way to invest money short-term?
Defining Short-Term Investments
Short-term investments are securities that an investor holds onto for an abbreviated time in hopes of converting their returns into cash. The investor typically aims for a security that’s expected to yield a return rate higher than that of most long-term holdings, like a 401(k) or IRA.
The definition of how “short” the investment period is can vary, but in general, it’s three years or less. Some experts even say it’s five years or less. Many investors make short-term investments that last only a few months or one year, receiving their investments and resultant gains as cash payments when the investment term ends.
The purpose of a short-term investor is to generate additional income, usually for a specific goal that’s coming up relatively soon. This could be the down payment on a house or a car, a vacation fund, capital to start a new business or any major investment or purchase that people tend to save up for. Alternately, a short-term investor may just be looking for more money to reinvest into other securities once they cash in.
Traits of Short-Term Investments
In the context of your investment portfolio, short-term investments are something of a protective layer for long-term holdings. When an emergency arises that requires an investor to generate cash in a hurry, they may be forced to dip into their long-term investments. Often, they’ll have to do so at a loss.
Short-term investments are structured to be liquidated quickly, so the investor can cash out without their bedrock, long-term investments taking the hit. In case of emergency, a short-term investment can be turned into cash with no penalties, keeping the rest of one’s other investments intact. This gives the investor much more flexibility with their capital investments and withdrawals.
Short-term investments are designed to produce a greater profit in a relatively brief amount of time. While you can certainly sell off a long-term investment, you will not only be divesting a valuable asset, but are also likely earn a lower profit. Short-term investments are built to be turned around quickly, with a greater chance of a better payout.
Risks of Short-Term Investments
Of course, as with any investment transaction, short-term investments come with some amount of risk. Some short-term investments are riskier than others, but they’re all subject to market fluctuations and unforeseeable events. Veteran investors understand that risk and still “play the game.”
In addition to that underlying risk, short-term investments can be a bit pricier upfront. They’re usually traded in exceedingly high volume because they have the potential to generate a lot of profit. That drives up the cost, along with inflation, taxes, and brokerage commission fees.
Short-term investments also need to be watched a little more closely. Investors must monitor price changes and fluctuations of their short-term investments and keep an eye on the best opportunities to sell or purchase their shares. This requires that the investor have a lot of knowledge and skill (or have immediate access to someone who does).
Lastly, certain short-term investment structures (especially certificates of deposit) can result in penalties to investors who withdraw funds before the investment matures. Even though the term is shorter, the investor still commits to see it all the way through. If you take money out before the term ends, your brokerage or financial institution will likely charge significant fees to cover their loss of your investment.
Some Popular Options
Financial institutions have several mechanisms that cater to short-term investors. These vehicles usually entail a minimal amount of risk; some are insured by the FDIC to prevent loss. These options include:
- Certificates of deposit (CDs). A CD is basically a short-term savings account issued by a bank. It offers a higher interest rate than a standard savings account, but the account holder can’t touch their money until the CD term expires or they’ll face substantial penalties. CDs are federally insured for deposits up to $250,000.
- Treasuries. Treasuries are bonds issued by the federal government to cover its operational or project costs. They’re issued with various term periods: short, long, and in between. Short-term treasuries typically mature within three years. Treasuries are also federally insured to hedge against loss.
- Money market accounts. A money market account is something of a hybrid between savings and checking accounts. Account holders can access their funds more easily than with other short-term options, and a money market account’s interest rate is usually higher than normal checking accounts. One drawback is that most banks require a minimum balance, with the account holder at risk of incurring fees and penalties if not maintained.
- Bonds. In addition to government-issued treasury bonds, any company or corporation can issue short-term bonds that mature within one to four years. They’re usually riskier than “sure things” like money market accounts and CDs, but their yields are generally higher. However, corporate bonds are not insured by the FDIC.
Using the Stock Market
Short-term trading on the stock market offers investors more flexibility than traditional options. There’s no minimum time commitment. Liquidity isn’t an issue; you can basically sell stock any time you want (depending on your brokerage’s policies).
Naturally, short-term stock trading carries a more substantial risk than CDs, bonds, or money market accounts. Stock transactions are not insured, and your investments are subject to market fluctuations and the chance of drastic losses.
Short-term stock trading also requires more attention, research, and day-to-day monitoring. The short-term stock investor must keep an eye on the moving averages of their commodities. They must thoroughly analyze the fundamentals and technical aspects of every company they’re likely to invest in. They must gain an understanding of economic cycles and learn what certain patterns and trends in the stock market mean. They must do whatever they can to limit their risk by setting stop-loss price points, and must carefully time their stock buys to maximize potential gains.
Even with all of those concerns, many short-term stock investors turn considerable profits, whether through day trading or well-timed, periodic divestments. Strong methods, sound research, and consistent daily management are hallmarks of a successful short-term investor.
Use Gorilla Trades for Short-Term Investments
The Gorilla Trades method was designed for everyday investors to profit from short-term investments. Since 1999 we’ve been helping them thrive by doing all of the deep technical analysis, carefully evaluating risks, finding ideal price points for maximum profit, and picking stocks that have consistent and dependable returns on an investment. We’re the ideal resource for anyone interested in short-term investing. Contact us to start a free trial.