Definition: A short-term investment, also called a temporary investment or marketable security, is a debt or equity security that is expected to be sold or converted into cash in the next 3 to 12 months. In other words, it’s a stock or bond that management holds to earn a quick return and plans on selling in the current accounting period.
What Does Short-Term Investment Mean?
Short-term investments have two main requirements. First, they must readily be convertible to cash. This means that obscure investments in privately held companies couldn’t be classified as a short-term investment. If it can’t be sold easily and readily, it isn’t a marketable security. Take a stock investment in a publicly traded company for example.
The stock price is easily determined and there are millions of investors ready and willing to purchase the shares from you.
Second, management must intend to convert or sell the investment within 3 to 12 months. This is a little bit of a gray area because it is based on management’s intentions. For example, management might purchase shares in Apple, Inc. as an investment intending to sell them in the next few months, but the market declines and management decides to keep them longer.
In this situation, the Apple shares would first be considered a temporary investment, but when management changes its mind and intends to keep them longer than the current accounting period, the shares are reclassified as a long-term investment.
Short-term investments are typically reported as a current asset on the balance sheet and are often grouped in with the cash and cash equivalents categories. This classification makes sense since numerous potential buyers easily convert the securities into cash. These investments can also be listed as trading securities if they are actively managed.