Short-term investments - what they are, types, examples and profitability

- a concept in economics, finance and psychology that characterizes the propensity of consumers and investors to make a particular decision under risk conditions. Risk aversion is said to occur when an investor prefers a certain outcome to an uncertain outcome with the same average return. For example, a risk-averse investor would rather put his money in a bank account with a low but guaranteed interest rate instead of investing in stocks that on average provide higher returns but also carry a high risk of losing part of the investment.

Risk aversion is closely related to the concepts of risk-neutral measures.

, used in the evaluation of derivative financial instruments and
risk appetite
, which describes the willingness to invest in high-risk financial instruments.

Economic essence of short-term investments

Every modern and enterprising person tries to create a source of additional income for himself. To this end, he invests his money in various projects.

Some people have impressive capital and prefer long-term investments with minimal risks and maximum profitability. And someone is afraid to part with money for a long time and chooses short-term investments.

Short-term investments are investments in certain projects for a period of up to 1 year in order to increase money.

In simple words, short-term investment is when you invest money in someone’s business, Internet project, securities, etc. for a period of no more than 12 months.

For example , you can put your hard-earned money on a deposit for up to 1 year, or make an investment in a promising business. The well-known financial pyramid MMM is also an example of short-term investing.

The profitability and liquidity of such investments depends on where you invest your money and how great the risks are. Most often this is 3-20% of the invested amount.

Many investors are attracted to such investments due to their short duration. This is because 1 year is a fairly short period of time that can be easily predicted. It is enough to assess the political situation in the country and observe changes in the exchange rate of the national currency.

Literature

• Arrow, KJ
  The theory of risk aversion // Collected Papers of Kenneth J. Arrow: Individual choice under certainty and uncertainty.
  - Harvard University Press, 1984. - Vol. 3. - P. 147-171. — 284 p. — ISBN 9780674137622. (first published: Arrow, KJ, 1965, The theory of risk aversion,
  in Aspects of the Theory of Risk Bearing, by Yrjö Jahnssonin Säätiö, Helsinki)
• [ssrn.com/abstract=941126 Risk Aversion of Individuals vs Risk Aversion of the Whole Economy]

Types of short-term investments

Investments for a short period can be of different forms and types:

• Securities issued by the state or municipality;
• Securities of various enterprises (for example, bills or bonds);
• Deposits that form part of the authorized capital of the enterprise;
• Loans provided by the company;
• Deposits with financial institutions;
• All types of accounts receivable;
• Contributions made under a partnership agreement.

Under certain circumstances, short-term investments can develop into long-term ones. But this point is always discussed between the parties before depositing funds.

Such investments vary in terms, forms, degree of risks and features of accounting for short-term investments.

Short-term investments do not include:

• Shares that a person has personally purchased from shareholders;
• Bills of exchange received by the seller for the goods or services he provided;
• Investments in real estate as payment for its temporary use;
• Tangible and intangible assets.

Not only individuals, but also large companies can invest money for a short term. In this case, short-term investments in the balance sheet should be shown in the “Current assets” section.

Most often, these forms of investment are used by entrepreneurs in order to protect their assets, represented in monetary form, from inflation. But the main goal of such investments is to make a profit due to the high liquidity of short-term investments.

Advantages and disadvantages

Short-term investments are available not only to companies and professional investors, but also to individuals. This is the main advantage of “quick” investments. Additionally, entrepreneurs have the opportunity to:

• work with a small amount of cash;
• withdraw capital from circulation on demand;
• make investments in several attractive objects at once;
• protect savings from inflation (depreciation) in unfavorable economic situations;
• opportunity to make a profit monthly.

But at the same time, there are disadvantages:

1. To get a tangible income, you need to invest at least $10,000, otherwise be content with very modest dividends;
2. Short-term investments are directly dependent on the political and economic situation in the country;
3. The list of risks is extensive and requires study.

In order to protect your fixed capital and get the desired profit, you need to understand the very essence of investments and spare no expense in consulting with experienced entrepreneurs.

Short-term investments on the Internet

The World Wide Web has penetrated into all spheres of human life. It is on the Internet that many people make their first million. You can become a wealthy person by making short-term investments on the Internet.

Now we will talk about the most popular methods:

1. Forex market . Becoming an investor in the Forex market is easy, but making money on it is not so easy. The meaning of such investment is as follows. You will have to choose a currency pair, for example, the euro and the Canadian dollar, and successfully buy one currency, and then exchange it for another at the right time. The exchange rate depends on many factors, and you can predict it using your analytical mind and complex programs. The risks are quite high, and untrained people will have to rely only on their intuition and luck, just like in a casino. It is highly not recommended to do this without preparation.
2. Investing in PAMM accounts . This is the same Forex market, only you do not make the transaction yourself, but entrust your hard-earned money to an experienced broker. He adds up his and your investments and opens a deal. If it is unsuccessful, then both lose; if the transaction is successful, then the broker takes his increased funds and gives you yours. The broker cannot withdraw your funds on its own.
3. HYIP projects . These are bright representatives of currency pyramids. You are offered to invest a certain amount at high interest rates (1-50% per day). You can make money this way, but it is a very risky undertaking. Such organizations can exist from 1 day to several months. The sooner you get there, the more likely it is that they will give you the money.

Where to invest money in 2018

Experts recommend investing in raw materials and materials in 2021. They believe that this is the least risky investment that will definitely pay off.

In addition, you should pay attention to the following short-term investment options:

• Investing in shares . You will need to choose a company that is confident in the market. Analyze its profitability and find out whether there is any prospect for growth in the stock. In order not to “burn out”, you must have a good understanding of the market. If you are a beginner, you can seek help from specialists who, for a fee, will help you choose a company and will accompany you throughout the entire transaction, right up to receiving increased funds.
• Investments in precious metals . At all times, people have sought to invest money in gold and silver. This is still true today. But when buying these precious metals, remember that they will not bring very much income. But the main advantage of such investments is their safety, since gold and silver, although slowly, are still growing in price.
• Investments related to the purchase of securities . Now more and more entrepreneurs are appearing with new ideas for business development. They offer investors to invest money in the development of their project. Before deciding to take such a step, an investor should think very carefully, because the risks are quite high.
• Financial investments in government securities . The government is offering to purchase Treasury bonds that can be sold in the future. This option involves minimal risks, but also minimal income.
• Investments in mutual funds . You fill out an application for redemption of a share. After this, you become the owner of part of the property mutual fund of a certain organization. The profit of the enterprise is divided among all shareholders. You can withdraw your money within a month after investing it.

Risks of short-term investments

Investors' opinions vary regarding the magnitude of the risks associated with short-term investing. Some believe that the fate of a deposit for 1 year is easy to predict. And the latter are not sure that even after a month they can get their money back.

In fact, it all depends on where and what you invest in. Options with the least risk bring small profits. And more risky projects promise to increase your capital several times and earn good money.

Let's look at different investment options in the table, which have different degrees of risk.

Before investing your hard-earned money, think 100 times, analyze the market situation, and consult with professionals in this field. This will help you avoid running into scammers and getting burned.

Classification by causes

The concept and types of risks in the field of investment are interrelated, and by studying their classification, you can determine what is the reason and how to reduce the likelihood of losing your capital. In general, risks can be internal, due to mismanagement or industry characteristics, or external, related to market characteristics, inflation, economic and political conditions.

However, the most common types of risks are:

• Inflationary – associated with rising inflation and a decrease in the real value of the asset. At the same time, the inflation rate can reduce the projected profitability and lead to the depreciation of capital. That is why, taking into account the expected percentage of income, the investor must analyze inflation, making sure that it does not exceed the rate of growth of the deposit.
• A decrease in the interest rate set by the Central Bank leads to an increase in demand for business loans, enterprises are less interested in investors, and the situation on the stock market improves.
• Foreign exchange – due to changes in foreign exchange rates, which entails an improvement or deterioration in the economic situation. Even if a company does not have foreign partners or deposits abroad, fluctuations in quotes will affect it indirectly or directly.
• Political – sources of occurrence – change of government, imposition of sanctions, military intervention. Such negative factors cannot be controlled by the investor.
• Sectoral - associated with the problems of a specific sector of the economy; all enterprises engaged in a single type of activity are subject to them.

Example: due to a bad harvest, all agricultural companies in the region are experiencing financial difficulties

• Business – arise due to ineffective management, when the company is run by insufficiently competent employees, which reduces efficiency

production leads to bankruptcy.
• Credit - appear if the investor contributes borrowed capital rather than his own. When it was not possible to obtain the predicted profit, it will not be possible to repay the loan to the bank in full.
• Labor – caused by negative factors within the organization. Personnel dissatisfied with working conditions may announce mass layoffs and strikes, which will lead to equipment downtime and material losses.
• Social – arise if buyers’ level of demand for goods and services changes. This happens due to inflation, decreased income, unemployment, or, conversely, economic prosperity.

For example, a company is focused on producing yoghurts of low quality, but sold at a low price. During a crisis, the population actively buys such products, and when income increases, they give preference to the competitor’s improved products

• Ecological and natural - associated with the outflow of population from a particular region due to environmental contamination, man-made disasters, and natural disasters.
• Legislative and legal - arise due to the adoption of a new regulatory act that worsens the position of the company.

Example: a ban on the sale of alcoholic beverages after 22:00 leads to losses in a wine producing company.

In addition, there is a scale of developments that determines the minimum, optimal and maximum risks depending on the type of activity of the enterprise. The investor determines for himself which project to prefer in order to protect his capital.

Recommendations for beginning investors

All investors were new at some point and made mistakes. Now they are not afraid to talk about their mistakes and are happy to share their experience.

Taking their advice into account, we have compiled recommendations for novice investors:

1. Gain practical experience on small accounts;
2. Develop your instincts;
3. Regularly study financial market news;
4. Delve into the work of new companies that arise in other countries;
5. Develop, look for new ideas for building a business;
6. Distribute the funds you invest across 2 or more assets. This will help you make large profits;
7. Before investing money, weigh your financial priorities with the size of your savings.