Short-term investments: What you need to know

A short-term investment is a financial investment that you can reap the rewards of typically within five years, although this can be a lot less at just three to 12 months.

Although short-term investments typically offer lower rates of return than long-term investments, they do have their advantages.

Short-term investments:

• Are highly liquid, allowing investors to withdraw money quickly if they need to.
• Usually involve a lower level of risk, making them a more stable investment option.
• Can help diversify income types, in case of market volatility.

Short-term investing can be useful if you want to generate some extra income or build up your retirement nest egg without making a big financial commitment. It’s also a good option if you need money for something in the near future (such as buying a car or a house) and don’t want to lock away your money for a long time, but still want to do some investing.

There are many ways to invest on a short-term basis. We break down the best short term investment options below.

Shares

Shares represent units of ownership in a company, meaning when you buy one you’re essentially the part-owner of a business. You can make money off shares by capital growth (when you buy them for a certain price and sell them for more) or through dividends (when companies pay you a percentage of their profits).

You can invest in a wide range of shares from low-risk blue-chip stocks or Exchange Traded Funds (ETFs) to higher risk micro-cap or speculative stocks.

High-interest savings account

The purpose of a high-interest savings account is to move your money from an account that bears little to no interest to one that does, in an effort to generate more cash. Putting your cash into a high-interest savings account is considered the least risky investment as it provides stable, regular income through interest payments.

Term deposit

Moving onto short-term cash investments, a term deposit lets you lock away a certain amount of money for as little as one month with a fixed interest rate, in an effort to increase it. Unlike a high-interest rate savings account where you can take out money whenever you want (albeit any withdrawal conditions), with a term deposit you have to wait until the term matures to access your cash.

Bonds

A bond is a type of lending. When you purchase a bond you’re essentially loaning money to an entity (typically a government or company) to fund activities or projects. In exchange for your loan, the bond issuer will pay you regular interest until the loan term ends, after which you’ll get your initial loan back.

Derivatives

Set between two or more parties, a derivative is a financial contract that derives its value from the performance of an underlying asset, group of assets or benchmark. Derivatives can be traded on an exchange or over-the-counter.

Foreign exchange market trading

The foreign exchange market, also known as Forex or FX, is a global decentralised or over-the-counter market. Here, you can buy and sell global currencies or do a contract for difference (CFD) where you essentially bet on the change in value of a foreign exchange rate.

Collectables

If purchased at the right time, collectables can generate a good short-term return. Collectables can be anything from coins and stamps to fine art and sneakers.

Commodities

Another short-term investment option is commodities. Commodities are raw materials such as gold, oil, gas, copper and wheat that can be thought of as the basic building blocks of our economy.

You can invest in commodities by buying shares in companies that produce them, or by purchasing them yourself from a dealer and selling them for a higher price down the track.

Property

Another way to invest is buying a property now and selling it later, for a higher price than what you bought it for. While property isn’t typically considered a short-term investment, residential property can be bought and sold for a short-term profit if done well.

Ultimately, the best short term investment is the one that makes the most sense for you once you’ve considered your personal and financial circumstances as well as your investment goals.