How Do Short-Term Investments and Marketable Securities Differ?

Short-term investments can include a number of possible investment vehicles. Marketable equity securities are just one of the possible choices a company might make for short-term investments.

Short-term investments vary widely among different businesses. Major corporations typically have billions of dollars in short-term investments that are managed by professional investment firms. For such corporations, cash management is a very important part of their businesses and may represent a very sizable second stream of revenue for the companies.

Small businesses may only have a few hundred to a few thousand dollars available for short-term investments, and the investments may well just be handled by the business owner or committed to a mutual fund.

Types of Short-Term Investments

For a security to be deemed a short-term investment, it must have two specific qualities. First, the investment must have a degree of marketability that allows it to be turned into cash quickly. Second, the company holding the security must have the intent to turn the investment into cash within one operating cycle, or one year, depending upon which period of time is longer. Such short-term investments are classified as current assets, and they generally fall into one of three categories: marketable debt securities, short-term paper or marketable equity securities.

Marketable Securities and Short-Term Paper

Marketable debt securities include short-term bonds held as a cash alternative. An active market should be available to guarantee liquidity for these investments.

Short-term paper includes investments that possess a maturity less than 270 days. Examples of the short-term paper include commercial paper, promissory notes, and U.S. Treasury bills (T-bills).

Marketable equity securities include common and preferred stock investments. Because the market for these investments is so active, they are considered to be nearly as liquid as cash.