Long term investment vs short term investment
Long term investment vs short term investment

Who does not want to become a millionaire? Everybody does, right? But not everyone knows the path to becoming a millionaire. Thousands of people search on Google for the best resources of money, how to earn money quickly, etc.

Have you ever searched for this type of question? Today in this blog, we will discuss the easy and excellent way to earn money. There are many ways to earn money, but investment is the best way to earn money quickly without hard work. But do you know what investment is?

Investment is the process of generating income from an asset and item accrued. Investment has two types:Long term investment vs short term investment. 

Precap: 

What is the investment?

Short term investment 

Long term investment 

Difference betweenLong term investment vs short term investment.

Quiz

What is the investment?

An asset or object acquired with the intention of creating income or recognition is referred to as an investment. Purchasing products that are not consumed immediately but will be utilized to create wealth down the road is an investment in an economic outlook. An investment in finance is a financial asset that is purchased with the expectation that it will either continue to generate income or be sold at a profit at a later date.

When it comes to investment, there are two types of investment:Long term investment vs short term investment. Long term investment vs short term investment has its advantages and disadvantages, and both can be successful if you use them correctly. Let’s discuss this in detail.

Short-term investment:

A short-term investment is an investment that is held for a relatively short time, typically no longer than five years. The main objective of a short-term investment is to generate income and profit from the sale of the investment. 

It is also known as marketable securities and temporary investments, which are financial investments that can easily be converted to cash within five years. Lots of short-term investments are sold and converted to cash after a period of only three- twelve months.

Types of Short-Term Investments

There are various types of short-term investments:

Bonds: 

Governments and businesses both issue bonds as debt securities. They are only in office for a year or less.

Stocks: 

Stocks are equity instruments that signify ownership in a corporation. They can be bought/sold on stock exchanges.

Mutual Funds:

Mutual funds are investment vehicles that pool money from lots of investors and invest it in different types of securities.

ETFs:

ETFs are investment vehicles that are similar to mutual funds, but ETFs are traded on stock exchanges.

Options: 

Options are contracts that give the holder the rights but not the obligation, to buy and sell a security at a specific price.

Futures: 

Futures are contracts that obligate the holder to buy and sell a security at a specific price at a future date.

Commodities: 

Commodities are physical goods that are traded on commodity exchanges.

Currencies. Currencies are traded on foreign exchange markets.

Long-term investment: 

It is an investment that is held for a period of more than five years. The main objective of a long-term investment is also to generate income and profit from the sale of the investment. 

These investments are assets that an individual and company intend to hold for a period of more than five years. Long-term investments include stocks, real estate, cash, etc. 

Types of Long-Term Investments?

There are also many types of long-term investments:

Bonds: 

Governments and businesses both issue bonds as debt securities. Bonds have terms that are longer than a year.

Stocks: 

Stocks: Stocks are equity securities that signify a company’s ownership. On stock exchanges, they can be bought and sold. For a stock to be regarded as a long-term investment, you must hold it for at least 12 months.

Mutual Funds: 

Mutual funds are investment vehicles that pool money from investors and invest it in various securities.

ETFs: 

ETFs are investment vehicles that are similar to mutual funds; ETFs, however, are traded on stock markets. In fixed-income securities with durations longer than ten years, ETFs invest.

Options: 

Options are contracts that give the holder the right, but not the obligation, to buy and sell a security at a specific price. (options that have an expiration date greater than one year)

Futures: 

Futures are contracts that obligate the holder to buy or sell a security at a specific price at a future date.

Commodities: 

Physical goods that are traded on commodity exchanges call commodities.

Currencies: 

They are traded on foreign exchange markets.

Also read: Why Investment Banking Analyst Is A Good Career Option

Difference between Long term investment vs short term investment.

In the above discussions, we could understand theLong term investment vs short term investments and the types of long-term and short-term investments. Now let’s discuss the key differences between these two types of investments.

S.NOPARTICULAR SHORT TERMLONG TERM
1MEANINGInvestment held for a short duration.Investment held for a period of more than five years.
2PERIODShort period.Long-term period.
3MARKET RISKThe risk level is low to moderate.High-risk factor.
4LIQUIDITYThe high degree of liquidity.Usually liquid in nature.
5LOSS COVERAGEDon’t provide enough time to cover loss in case investments go negative.Provide an opportunity to wait for the right time to sell and make a profit.
6RATE OF RETURNLower rate of returnHigh rate of return
7INVESTORSActive investorsPassive investors
8PERIOD OF INVESTMENTLess than five yearMore than five year
9FLEXIBILITY It is a quite flexibility Not flexibility
10LEVEL OF BENEFITS EXPECTEDVery uncertainQuite profitable

Period:

Short-term investments are held for a short duration, generally less than five years. Investors may sell, exit, and liquidate their investments in a few hours.

On the other hand, long-term investments are held for a longer duration, always more than five years. Investors may hold investments for as long as 20 years and even more in some cases, like government bonds.

Market Risk:

When it comes to short-term investments, the risk is low to moderate. This is because the period is quite less for factors like changes in interest rates to affect the prices of investments.

Long-term investments are almost always high risk. Their prices and returns can be volatile, and in some cases, the long-term investment may provide negative returns even after holding them for several years. 

Liquidity:

Short-term investments have a high level of liquidity. Investors can convert them into cash and equivalent at very short notice.

Long-term investments, however, are typically illiquid. It is usually not possible to convert them into cash and equivalent at short notice.

Loss coverage:

Short-term investments do not give investors enough time to recoup their losses if their investments lose money.

Long-term investments give investors a chance to hold onto their money until the ideal moment. 

Rate of Return:

Short-term investments usually provide less rates of return as compared to long-term investments. 

Active and Passive Investors:

Active investors usually invest in short-term investments since they are dedicated and give enough time to take care of their investments.

Passive investors usually prefer to invest in long-term investments and hold them for a long duration.

Quiz: Long term investment vs short term investment

1Que- Short-term investments should mature within this time frame:

  1. One year
  2. Six months
  3. Three years
  4. Three months

2 Que- When companies trade municipal notes up to $1 billion, they are involved in this type of short-term market investment:

  1. Money market
  2. Savings account
  3. CD
  4. Government bond

3Que- What is a key feature of a short-term investment?

  1. It has a low return.
  2. It has a low risk.
  3. It is considered a liquid asset.
  4. All of the answers are correct.

4Que- The two requirements for an investment to be considered short-term are _____ and _____.

  1. The investment must be illiquid; the investment must be sold outside of 12 months
  2. The investment must be liquid; the investment must be sold within 12 months
  3. The investment must be liquid; the investment must be sold outside of 12 months
  4. The investment must be illiquid, and the investment must be sold within 12 months

5Que- All of the following are types of long-term securities EXCEPT for _____.

  1. held-to-sale
  2. trading securities
  3. held-to-maturity
  4. available for sale

Conclusion 

As we read above, Investors who invest in financial instruments with a one-year or less time horizon in mind are called short-term investors. On the other hand, long-term investors are those who invest in long-term financial instruments and hold them for some time greater than a year. Long term investment vs short term investment have various types of benefits; it all depends on you how much time you want to invest your money.

FAQs: Long term investment vs short term investment

Que1. Is long term investing profitable?

The main benefit of long term investment is that it generates high returns on total investment.

Que2.Why are long term investments safer?

The longer period gives you more time to come out the ups and downs of the market.

Que3. What is the best way to invest money?

-High-yield savings accounts.
-Certificates of deposit (CDs)
-Money market funds.
-Government bonds.
-Corporate bonds.
-Mutual funds.
-Index funds.
-Exchange-traded funds (ETFs)