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How To Calculate The Short-term Investment Balance Sheet

2020-12-02

2020-12-02

Short Term InvestmentsOleg Tkachenko

Short-term investing means placing excess cash into various assets for a short time to make quick profits.

Short-term investors are people who

  • aren’t risk-prone. They prefer to make a short-term investment and then withdraw money fast once the profit becomes tangible. They aren’t psychologically ready to be waiting for long, and they are often afraid of force majeure that can devalue their money.
  • have a superficial knowledge of investing specifics, can’t assess risks and other relevant factors, or simply don’t have time for that.
  • are emotional adventurers. They want to see quick, tangible results and are often fans of scalping, [high-risk Pump & Dump strategies][1], pyramid schemes, and HYIP projects.

I’ll examine short-term investments and their pros and cons in this article. I’ll provide short-term investment examples and talk about the rules for reporting short-term investments on a balance sheet when forming or rebalancing an investment portfolio.

The article covers the following subjects:

What are short term investments?

There’s no common term for “short-term investments” because “short-term” will mean different periods for different asset groups. I would say that “short-term investments” means exploiting an investment idea or event that is supposed to happen in the near time and then withdrawing money from the asset. If a strategy implies exploiting a series of events regularly without withdrawing the investment, it can be called a medium- term strategy.

Investments are called “short-term” or “medium-term” based on how often the asset’s price changes amid some important events. A short-term strategy implies investing in highly liquid assets - current assets - that can be bought and sold with a minimal margin.

Here are some examples:

  • In accounting, short-term investments refer to working assets used within one year. Long-term investments are over one year.
  • In classical investing (bank deposits, government bonds, mutual funds), short-term investments refer to investing within one month.
  • In Forex trading, short-term strategies imply opening trading within one day. They include scalping and intraday strategies.

There are two ways of earning from the best short-term investments: exploiting spreads - the difference between an asset’s buying and selling prices - and earning interest.

Short-term investment objectives:

  1. To protect free cash from inflation. For example, we can invest excess cash in deposits and government securities.

  2. To earn money from a particular fundamental event. For example, buy Amazon stocks before a financial results publication and sell them after the quotes grow.

  3. To earn from active trading and minimize risks. Examples:

    • Scalping. A price direction doesn’t matter to traders. They earn from any short-term move.
    • Social Trading. An investor can copy a trader’s high-risk money-making signals and then close trades a bit earlier with moderate profits and lower risks.

  4. To gain some investing experience. Beginner investors don’t have to make long-term investments.

Top 10 best Short Term Investments types

Each of the following options can yield from 0.5% to 100% per annum or more in one day or in a few months. They all belong to short-term investments and are characterized by different risk levels.

Short-term investment options:

1. Short-term bank deposits, call deposits, high-yield savings accounts. One-week or one-month deposits that can be immediately withdrawn at a client’s request.

Pros:

  • Reliability. Fixed bank deposits are insured. In the USA, it’s Federal Deposit Insurance Corporation that underwrites bank deposits.
  • Low entry threshold.

Cons:

  • Low profitability that sometimes can’t cover inflation.

Another example of short-term investments is certificates of deposit. They are securities issued by banks.

2. P2P lending. There exist micro-financial companies and platforms where physical persons lend money to other physical persons. An investment period lasts from a few days to a few months.

Pros:

  • Profitability is much higher as compared with bank deposits.

Cons:

  • High risk. Such deposits aren’t insured, and there’s a high chance of not getting money back. Such platforms can go bankrupt, or they can be financial frauds.

Crowdlending can be an alternative to P2P lending. Investors are physical persons, and borrowers are legal entities there. You are likelier to have your money back with profits than with P2P lending. However, the investment period is longer and starts at one month.

3. Treasury bonds, government, and municipal bonds.

Pros:

  • They are government-secured and imply minimal risks

Cons:

  • Profitability levels comparable with inflation ones.

4. Stock market assets: shares, corporate bonds, commodity futures, etc. For example, a short-term strategy may be buying shares before publications of financial reports. That will be short-term trading based on fundamental analysis.

Pros:

  • Wide variety of tools to create a well-balanced and diversified investment portfolio.
  • Moderate risks.

Cons:

  • Relatively low profitability in the short term.

5. Investment funds, short-term investment funds, short-term mutual funds. Imply asset trust management. The main investment assets are stock markets’ assets, metals, commodities, bank deposits, real estate, etc.

Pros:

  • Strict regulation aimed at minimizing investing risks.
  • Relatively low entry threshold.
  • The investor doesn’t need to look into financial specifics or market analysis.

Cons:

  • No guarantee of profitability; possibility of loss.

6. Currency purchase at banks, exchange points; trading currency pairs in currency or OTC markets.

Pros:

  • Ordinary people can protect money from short-term hyperinflation.
  • Active traders and investors can earn from short-term currency moves.

Cons:

  • For ordinary people, it’s just protection against inflation, no real profitability. No guarantees; possibility of loss.
  • For active traders, the risk is quite high.

7. Passive investments at Forex: social trading and some other options. You open an account with a broker and copy trades from professionals into your account.

Pros:

Cons:

  • Experience in risk management and trading is obligatory. An investor needs to know quite much about trading statistics and types of strategy.

8. Инвестиции в высоколиквидные активы. Все, что может принести быструю краткосрочную прибыль. Например, инвестиции в IPO, в инвестиционные и коллекционные монеты.

Pros:

  • Eventual profitability: 10% or more within 1-30 days.

Cons:

  • High risk of overestimating an asset’s prospects
  • Promising assets are hard to find

9. Cryptocurrency Cryptocurrencies’ volatility is 0.5-5% a day. They are one of the most profitable and highest-risk tools for short- term investing.

Pros:

  • High profitability. A few days can be enough to cover the margin and commissions.

Cons:

  • High risk. The volatility of up to 5% a day means the loss may be as high.
  • Hard to forecast. Institutional investors that affect the price are unpredictable.
  • High margin.

10. HYIPs (High-Yield Investment Programs). Financial online pyramid schemes that don’t disguise their essence. They are the favourite short-term investment asset for those who love ventures and excitement. Read about HYIPs in our review [Pyramid schemes: to be or not to be?][2]

Pros:

  • Profitability can go up to 100% and more within a few days.

Cons:

  • Similar to casinos or lotteries in terms of earning opportunities.

Those were just a few examples of a short term investment with different risk degrees. Feel free to add some more options into this list in the comments section if you have some!

Why make short-term investments?

1. You can earn fast from fundamental analysis.

  • Example: on 30th July 2020, Apple published its Q3 financial reports. The 11% profit growth and 18% net profit growth per share raised quotes immediately.

We can profit from publication of [Non-farm Payrolls][3] in the same way.

2. Most often, the entry threshold is relatively low. For example, 50-100 USD will be enough for investing in [CFDs][4] on shares, commodities, or currency pairs. The minimum sum for investing in deposits is up to 500 USD.

3. Opportunity to cash in investments quickly. For example, a lot of long-term mutual funds don’t permit any early money withdrawals. If a force majeure event occurs (a pandemic, a new economic crisis), a trader will be watching his or her losses grow.

The main advantage of short-term investments is that they can be withdrawn fast. Although short-term investments incur different levels of risks, this kind of investment is a better option than investing in the long term.

How to invest short term?

Social trading is one of the most appealing short-term investment options for a few reasons:

  • Low entry threshold: the minimal deposit is just 50 USD.
  • Basic economic and trading knowledge is enough. You copy professional traders’ trades automatically, without having to look too much into their strategies or following news.
  • You can uncopy a trader at any moment.

You will only need to

  • open an account and top it up. The link is [here][5].
  • choose one or several traders from the rating by clicking on “Copy” in the tools panel of your Client Area. Choose traders with higher profitability and a lower risk level. Risk levels are calculated automatically according to LiteForex’s risk management system.

Beginner short-term investors should choose traders based on the following criteria:

  • Risk level: 1 or 2.
  • Number of investors: over 100.
  • Account lifespan: from 6 months.
  • One trade’s lifespan: up to several hours intraday.
  • Profitability level: the higher, the better.

Check this review of [Social trading][6] to learn how to choose traders to copy.

How To Calculate The Short-term Investment Balance Sheet

A balance sheet is a company’s statement that evaluates its financial state in a certain period. A balance consists of two parts:

1. Assets: the resources that a company owns and that are expected to yield profits in the future. These are resources owned by a company or payable to a company: for example, money or receivables. Assets include:

  • Non-current assets - low liquidity assets. Real estate, equipment, intangible assets, capital investments, etc.
  • Current assets - high liquidity assets. Current temporary financial investments: in deposits, securities, etc.; receivables; money; stocks. The term “receivables” is also known as commodity credit.

2. Liabilities are a company’s debts to other persons. In the future, they will result in the company’s money outflows. Liabilities include:

  • Capital - authorized capital, capital reserve, revaluation results, undistributed profit.
  • Short-term and long-term liabilities: payables, debt, etc.

A Balance is always in equilibrium: the left part is always equal to the right one:

Assets = Liabilities + Capital

Short-term investments on a balance sheet are:

  • 1-year deposits.
  • Securities bought: company stocks, government, and corporate bonds, investing in certificates of deposit, etc.
  • Short-term loans.

In accounting, all the above-mentioned refers to legal entities, but it can concern private investors too. On a good investment portfolio balance sheet, assets are diversified based on term, liquidity, risk levels, and profitability.

A balance sheet which shows assets on separate lines allows structuring information efficiently:

  • it reduces profitability to a common denominator, for example, expresses total profitability in % per annum;
  • it allows comparing risk levels of different periods and assets;
  • it determines the most and the least profitable instruments in the short term.

Regular revaluations and restructuring of short-term investment portfolios are called “rebalancing.”

Example of short term investments on the balance sheet

Let’s find out how to create and optimize a short-term investment balance sheet through the example of social trading.

Step 1. Form an initial balance. Add to your portfolio three traders that comply with the following criteria:

  • Account lifespan: from 6 months.

  • Number of investors: at least 50.

  • One-month profitability: from 3%.

That’s a conservative, low-risk portfolio. Also, it would be wise to diversify your portfolio based on strategy types and assets by copying trades of Forex, stock, and commodity traders.

Step 2. Make a balance statement. A statement is a table for writing down temporary investments and for rebalancing.

My working capital is 100 USD, and the investment term is one month. Before distributing my money among the three traders, I check their 3-month yield curves and their traded assets. The assets are all different: various currency pairs and occasional copy trading. The yield curves are more interesting:

1. Gerakan Rahsia:

My working capital is 100 USD, and the investment term is one month. Before distributing my money among the three traders, I check their 3-month yield curves and their traded assets. The assets are all different: various currency pairs and occasional copy trading. The yield curves are more interesting:

2. Gerakan Rahsia:

The risk level is 3. The 3-month equity is growing, but in a longer term, trading is unstable.

3. NoDamage:

The risk level is 3; the 3-month and 6-month deposit curves are stably growing.

So, let’s invest 50% in the third, most successful trader, 20% in the second trader, and 30% in the first, lowest-risk trader.

Step 3. Short-term investment rebalancing. Since the investment period is one month, review the portfolio weekly. There are three ways to rebalance a portfolio:

  • Withdraw profits from a successful trader’s trades and reinvest them in that trader again.
  • Make a payment into the account and invest it in the least successful trader to cover his/her losses, hoping that the drawdown is temporary.
  • Withdraw profits from a successful trader’s trades and reinvest them in the least successful trader to cover his/her losses.

However, remember that profitability factors do not guarantee future success. The market is cyclic, and the current loss may yield profits in the future.

One week later, we see the following results:

The first and the third traders got positive in a week, though they didn’t reach average monthly results. The second trader got negative, and the level of interest in that trader has fallen. On the whole, the investment made profits in a week.

I marked the last column orange and left it empty deliberately. You should fill it in yourself according to your strategy. You leave everything as it is, or you rebalance your portfolio using any of the three methods above, change a trader, or add more traders into the portfolio every week. You can download an Excel table [here][7].

That was a general principle for making a short-term investment portfolio sheet. Feel free to ask me any questions in the comments section below.

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Summary

A short-term investment strategy allows making fast profits with a moderate deposit. Profit levels depend on risk levels: deposits hardly ever cover inflation while cryptocurrencies can yield 1-2% profits and more in a few days.

When forming a short-term investment portfolio, an investor needs to consider the following factors:

  • Period. From a few minutes to one year.
  • Risk level. Balance lines can vary from lowest to highest risk.
  • Profitability and liquidity levels.

Remember to rebalance and optimize your portfolio to have the highest yields and not to risk too much.

Short-term Investment Balance Sheet FAQ

P.S. Did you like my article? Share it in social networks: it will be the best “thank you” :)

Ask me questions and comment below. I’ll be glad to answer your questions and give necessary explanations.

Useful links:

  • I recommend trying to trade with a reliable broker [here][9]. The system allows you to trade by yourself or copy successful traders from all across the globe.
  • Use my promo-code BLOG for getting deposit bonus 50% on LiteForex platform. Just enter this code in the appropriate field while [depositing][10] your trading account.
  • Telegram chat for traders: . We are sharing the signals and trading experience
  • Telegram channel with high-quality analytics, Forex reviews, training articles, and other useful things for traders

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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  1. www.liteforex.com/blog/for-professionals/pump-dump-strategy-how-to-take-an-advantage-of-it-and-not-be-deceived/
  2. www.liteforex.com/blog/for-investors/pyramid-schemes-to-be-or-not-to-be/
  3. www.liteforex.com/blog/for-beginners/what-is-the-non-farm-payrolls-report-on-forex/
  4. www.liteforex.com/blog/for-beginners/cfd-trading/
  5. liteforex.com/social-trading/
  6. www.liteforex.com/blog/for-investors/pamm-vs-copy-trading/
  7. docs.google.com/spreadsheets/d/1c1VytbNveE8-FN4S0IUGUGyCBJfa2gU1/edit#gid=1481824473
  8. my.liteforex.com/traders?type=profit
  9. my.liteforex.com/?category=for-investors&slug=short-term-investment-on-balance-sheet&openPopup=%2Fregistration%2Fpopup&utm_source=blog&utm_medium=article&utm_campaign=bonus
  10. my.liteforex.com/deposit/?category=for-investors&slug=short-term-investment-on-balance-sheet&promo_code=BLOG&utm_source=blog&utm_medium=article&utm_campaign=bonus