7 Best Short Term Investments in 2023

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Contributor, Benzinga
August 6, 2023

The stock market's recent rallies can spell intimidation if you're a new investor. On one hand, you want to participate, but on the other hand, there's always a fear of “buying the top.”

Plus, with the abundance of educational material available on the web, coupled with Bitcoin and other spectacular cryptocurrency rallies, it's no wonder many new investors feel left out.

What are Short-Term Investments?

Short-term investments are financial instruments that are designed to be held for a short period of time, typically less than one year. These investments are widely used by individuals and businesses to preserve capital, generate income, or take advantage of short-term market opportunities.

Understanding short-term investments requires a clear understanding of their characteristics. First and foremost, short-term investments are highly liquid, meaning they can be easily bought or sold without incurring significant costs or delays. This liquidity is valuable for investors who may need to access their funds quickly in case of an emergency or to take advantage of other investment opportunities.

Short-term investments offer investors the opportunity to preserve capital, generate income, and take advantage of short-term market opportunities. They are highly liquid, but may also carry a higher level of risk compared to long-term investments. This is especially true for short-term stock or cryptocurrency trading.

On the other hand, some short-term investments, such as include money market accounts, certificates of deposit (CDs), Treasury bills, short-term bonds, and high-yield savings accounts, may actually offer more security than long-term investments.

Top 7 Short-Term Investments in 2023

Here is a breakdown of short term investment vehicles and the risks associated with them:

1. Cryptocurrencies

  • Time Frame: 0-6 months, and longer
  • Risks: Volatile and can be illiquid

Some fortunate cryptocurrency holders saw massive gains in the past several years due to the unprecedented runs of coins like Bitcoin, Ethereum, and Litecoin.

Some of the key advantages of investing in crypto (in addition to the ease of opening an account) are the returns you can make from such a small investment. For instance, the value of gold rose roughly 18% over the past year in 2017. Google shares are up 24%. Some cryptocurrencies have had gains as high as 2000% in the past year.

2. Options Trading

  • Time Frame: 0-6 months, and longer
  • Risks: Timing for entries/exits is critical

Options trading is actually quite similar to trading stocks. One key difference is that an option is a contract to buy or sell a stock at a price that has already been negotiated in a contract, and by a particular date.

Options also typically have much lower commissions, and depending on which brokerage you are using, they are typically pretty transparent about hidden fees. You can even choose a discount brokerage account if you are looking to trim costs even further. A major attraction to options is leverage, which gives you the ability to control much more stock via cheaper options than purchasing shares of the underlying issue. When purchasing options, you cannot lose more than your initial investment.   It's not the same with stocks. Buying and holding stocks overnight on margin can result in steep losses if bad news comes out overnight.  

There are a number of options trading platforms that Benzinga has taken a look at. Take a look at some of our favorites.

3. Futures Trading

  • Time Frame: 1-3 years, and longer
  • Risks: Timing for entries/exits is critical

Futures initially were designed to be focused on agricultural commodities to allow farmers the ability to hedge against the prices of their crops before bringing them to market. They have since, however, expanded to cover a range of other assets, from gold and other precious metals to energy assets such as oil. Leverage is an important component in futures trading. In addition, the futures market is nearly a 24-hour market, so futures can be traded at night, which is handy if you have a day job, too.  

4. Day Trading Stocks

  • Time Frame: 0-6 months
  • Risks: High commissions

Day trading is the act of buying a financial instrument and then selling that within the same trading day. This practice is applicable to a number of asset classes including stock, options, futures, and currencies.

This practice was once exclusive to financial firms and professionals, but with advancements in margin and electronic trading, private individuals have the ability to day trade.

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5. High-Yield Savings Accounts

Savings accounts are perhaps the most common form of short-term investment. They are usually offered by banks and credit unions, providing a safe and secure place to store your money. Compared to other types of investments, savings accounts offer low risk and a guaranteed rate of return. While interest rates may be relatively lower than stocks or other types of investments, they are ideal for individuals who want to easily access their funds in case of emergencies or unexpected expenses.

Take a look at the best high-yield savings accounts in 2023 here.

6. Certificates of Deposit (CDs)

Certificates of deposit (CDs) are another popular option for short-term investors. When you purchase a CD, you agree to deposit a specific amount of money for a fixed period of time, usually ranging from a few months to a few years. In return, the bank pays you interest at a predetermined rate. CDs are considered low-risk investments, and the longer the term of the CD, the higher the interest rate will be. However, it's important to note that CDs typically have penalties for early withdrawal, so it's essential to carefully consider your investment timeline before committing to a CD.

Review the best CD rates on the market here.

7. Money Market Funds

Money market funds are yet another short-term investment option worth exploring. These funds invest in highly liquid, low-risk securities such as Treasury bills, certificates of deposit, and commercial paper. Money market funds aim to maintain a stable net asset value of $1 per share, making them a relatively safe investment choice. While they may not offer high returns compared to other investments, their focus on liquidity and stability makes them an attractive option for short-term investors looking for capital preservation.

Getting The Most Out Of Your Short-Term Investments

In short, identifying the best short-term investments requires a keen understanding of one's financial goals, risk tolerance, and prevailing market conditions. Know that diversification and a periodic reevaluation are crucial to ensure your short-term investments align with your evolving financial objectives.

Remember, short-term investments are generally held to carry more risk than a long-term strategy. And while they may not generate life-changing gains, they can play an essential role in strengthening your diversification.

Frequently Asked Questions

Q

What are the benefits of short-term investments?

A

There are several benefits of short-term investments. Firstly, they provide opportunities for quick returns and can be useful for meeting short-term financial goals or emergencies. Secondly, short-term investments often offer better liquidity, allowing investors to access their funds when needed. Finally, they are generally considered less risky compared to long-term investments.

Q

What should I consider when choosing a short-term investment?

A

When selecting a short-term investment, consider factors such as the interest rate or yield offered, the level of risk you’re comfortable with, and the investment duration. It’s also important to assess the financial institution’s reputation, fees, and any applicable penalties for early withdrawal. Consulting with a financial advisor can provide valuable insights and help you make an informed decision.

Q

Can short-term investments provide substantial returns?

A

Short-term investments are generally not considered as high-return investments. Their primary purpose is capital preservation and liquidity. While they can generate modest returns, one should not expect substantial gains compared to long-term investments or riskier assets. It’s important to align expectations based on the specific short-term investment choice and market conditions. Remember, before making any investment decisions, it is always advisable to consult with a financial advisor or conduct thorough research to ensure the chosen investment strategy aligns with your financial goals and risk tolerance.