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Long Term Investments

Updated on January 2, 2024
Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What Are Long Term Investments?

Long-term investments refer to the investments made in various financial instruments that the investors plan to hold for a longer period, normally a year or more. The investors opt for such investment options realizing huge profits awaiting the end of those investments for long term.

What Are Long Term Investments

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While the benefits of these investments are significant, the associated risks are also high. Hence, it needs the courage to trust the long-term profit realization and stick to holding such investments for more than a year. In short, these investments for the long term are for risk-takers.

Key Takeaways

  • Long term investments refer to financial instruments in the form of stocks, bonds, cash equivalents, or real estate assets that the company intends to hold for more than 365 days.
  • It is to maximize the company’s profits and is reported on the asset side of the balance sheet under the head of non-current assets.
  • It generates a steady amount of regular income for the company in interest or dividends that can be used in routine operations.
  • These investments also reflect the risk-taking ability of investors and the comfort of parking the excess funds in long term assets that can generate higher returns.

Long Term Investments Explained

The long term investments signify long term benefits that await investors. The objective here is not to sell the investments held in a short period but to use them to cushion future needs. It generates a steady amount of regular income for the company in interest or dividendsDividendsDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity.read more that can be used in routine operations.

The long-term investments on the balance sheet are on the asset side. This type of investment is not for the speculators or the traders who like to earn money daily by buying and selling securities and desire to be richer in a shorter duration. In this type of investing, the longer the period, the better the returns.

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Types

Long-term investments can be of various categories based on the instrument people invest in, including stocks, bonds, real estate, and cash equivalents. Investing in equity shares of a company is one of the best long term investments. This is because it can generate higher returns and enhance capital appreciationCapital AppreciationCapital appreciation refers to an increase in the market value of assets relative to their purchase price over a specified time period. Stocks, land, buildings, fixed assets, and other types of owned property are examples of assets.read more.

Long Term Investments Types

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Equities are quite volatile, especially when invested for a shorter term. However, long term investments in stocks and equities could be beneficial. In the Covid 19 era, when the market did not do well, many investors turned patient and waited for the phase to get over. Their patience worked in their favor, and they reaped gains unexpectedly, with the market recovering faster.

Bonds refer to investments done in the fixed incomeFixed IncomeFixed Income refers to those investments that pay fixed interests and dividends to the investors until maturity. Government and corporate bonds are examples of fixed income investments.read more market as debentures or G-Secs, promising a steady income in the form of interest. Plus, there are properties for sale that investors invest in as the value of real estate tends to increase in the long run. Such investments include spending on land, buildings, etc.

Cash equivalent investments involve investing in certificates of deposit (CD), high-interest savings accounts, etc. Investors prefer these over others, given the stable rate of return that these investments offer. Though the rate of return is low, the investment guarantees some return with little or no risks involved. This is why people consider such investments for their retirement planning.

Examples

Let us consider the following long term investments examples to understand the concept better:

Example 1

ABC Ltd., a telecom service provider, requires investing heavily in technology to run its operations smoothly. The company sets up a fiber-optic network to build a connection to the people. This, as a result, ensures it keeps operating conveniently, thereby offering satisfactory services. Hence, such types of investingThe Types Of InvestingStocks, bonds, and cash equivalents are the three main forms of investments. Investment, in general, refers to the purchase of anything for future use with the goal of generating a regular cash flow or increasing the value of something over time so that it can be sold for a higher price than it was purchased for, i.e. capital gains. read more become long-term investments.

Long Term Investments Example

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Example #2

When real estate investors, like Everstone or Blackstone, invest in companies that build malls and commercial towers, such investments are termed long-term investments since they would require at least 5-7 years to execute and yield returns. 

Advantages & Disadvantages

These investments are both advantageous and riskier based on the fluctuations that the market goes through. So, let us have a quick look at them:

Advantages 

  • It offers higher returns to the investor investing for a long time, thereby reducing the risk.
  • Such investments held for a longer period generate higher returns since the compounding of the interest plays a vital role.
  • It also helps create wealth since investing systematically for a longer tenure gives superior returns to the investors.
  • It builds confidence among the investors and acts as a cushion as and when the investment starts performing and generating higher yields for its investors.

Disadvantages

  • Investing for the long term results in locking the funds for a more extended period. It makes it difficult to liquidate in time of need.
  • Requires a high level of patience to hold on to his investment despite any fall in value.
  • Involves a lot of homework to select the best investment as one wrong decision can ruin the entire plan.
  • Requires constant monitoring to check the investment health and take appropriate measures to manage the deteriorating ones.

Long Term Investments vs Short Term Investments

The long term and short term investmentsShort Term InvestmentsShort term investments are those financial instruments which can be easily converted into cash in the next three to twelve months and are classified as current assets on the balance sheet. Most companies opt for such investments and park excess cash due to liquidity and solvency reasons.read more differ not only in terms of what their names suggest but also in other aspects.

  • As investors can hold investments for a longer period, the investments get enough time to grow. Short-term investments, on the contrary, are quick in reaping returns and incurring a loss.
  • The latter cannot wait for the market to recover, whereas the former does.

Whether one should make a long term or short term investment depends on the purpose one wants to fulfill. 

  • If the purpose is to invest in a less risky deal, investors should choose short-term options as they are manageable even if losses occur. 
  • On the other hand, long-term investment options sometimes lead to adverse effects, unbearable for investors. However, if they reap returns, it is always unexpectedly high. 

Frequently Asked Questions (FAQs)

Why is long term investment good?

These investment options are considered ideal as it is better to invest in a long term deal than the frequent buying and selling of financial instruments. It is more cost-effective. The best part is that it allows investors to hold their investments until they find a higher price to sell them further.

Are long term investments current assets?

As the investments for longer terms do not give instant results and could be held for more than a year, these are not considered current assets. Also, these investments are referred to as non-current assets.

How to make a long term investment?

Investors need to assess their financial goals before investing in long term options. Once the goals are clear, choosing the type of instrument to invest in becomes clearer. For example, they can invest in stocks and gain ownership in a company or in bonds to get the principal back along with the additional gain. Other instruments to invest in could be property, cash equivalents, mutual funds, Exchange-traded Funds (ETFs), tax-free bonds, etc.

This article is a guide to what are Long Term Investments. Here, we discuss how they work in stocks along with their examples, advantages, and disadvantages. You can learn more from the following accounting articles –