Long term 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 vs short term investment.
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.
Long Term vs Short Term Investment
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.
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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 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.
Difference between Long term vs short term investment
In the above discussions, we could understand the Long term vs short term investments and the types of long term vs short term investment.
Now let’s discuss the key differences between these two types of investments.
| S.NO | PARTICULAR | SHORT TERM | LONG TERM |
| 1 | MEANING | Investment held for a short duration. | Investment held for a period of more than five years. |
| 2 | PERIOD | Short period. | Long-term period. |
| 3 | MARKET RISK | The risk level is low to moderate. | High-risk factor. |
| 4 | LIQUIDITY | The high degree of liquidity. | Usually liquid in nature. |
| 5 | LOSS COVERAGE | Don’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. |
| 6 | RATE OF RETURN | Lower rate of return | High rate of return |
| 7 | INVESTORS | Active investors | Passive investors |
| 8 | PERIOD OF INVESTMENT | Less than five year | More than five year |
| 9 | FLEXIBILITY | It is a quite flexibility | Not flexibility |
| 10 | LEVEL OF BENEFITS EXPECTED | Very uncertain | Quite 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
1 Que- Short-term investments should mature within this time frame:
- One year
- Six months
- Three years
- Three months
2 Que- When companies trade municipal notes up to $1 billion, they are involved in this type of short-term market investment:
- Money market
- Savings account
- CD
- Government bond
3 Que- What is a key feature of a short-term investment?
- It has a low return.
- It has a low risk.
- It is considered a liquid asset.
- All of the answers are correct.
4 Que- The two requirements for an investment to be considered short-term are _____ and _____.
- The investment must be illiquid; the investment must be sold outside of 12 months
- The investment must be liquid; the investment must be sold within 12 months
- The investment must be liquid; the investment must be sold outside of 12 months
- The investment must be illiquid, and the investment must be sold within 12 months
5 Que- All of the following are types of long-term securities EXCEPT for _____.
- held-to-sale
- trading securities
- held-to-maturity
- available for sale
Conclusion
Here is the end of long term vs short term investment guide. 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. Both investments have various types of benefits; it all depends on you how much time you want to invest your money.
If you think that we have missed anything on long term vs short term investment then comment down below.