Near Term

Article byGayatri Ailani
Reviewed byDheeraj Vaidya, CFA, FRM

Near Term Meaning

The Near Term refers to the near future period in which an entity is expected to witness an event or change, such as a short-term price movement in the stock market or a short-duration trade. It is important for risk assessment. It helps entities distinguish between short-term and long-term strategies.

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This expression is commonly used by finance professionals to convey the timing of events or changes to clients, stakeholders, and team members. It enhances clarity and reduces ambiguity in discussions. It helps decision-makers prioritize actions and allocate resources based on the urgency of short-term objectives and requirements.

Key Takeaways

  • The term “near term” refers to a relatively shorter period of time, which is expected to arrive within a short duration.
  • Traders, especially day traders and swing traders, focus on the near term to make short-duration trades and capitalize on short-term price movements.
  • Financial analysts and experts often make predictions about market trends and asset prices in the near term. They use this timeframe to provide insights into what might happen in the coming weeks or months.

Near Term In Finance And Business Explained

Near term is an expression used in finance, economics, and business to describe a relatively short period of time, i.e., a period that is approaching soon and does not extend too far into the future. The exact duration can vary based on the context. In finance, it often refers to events, trades, or strategies expected to occur or unfold in the coming weeks or months.

Such investments or trades involve acquiring assets with the intention of holding them briefly, usually for a few weeks or months. It can also involve trading options or futures with close-to-expiry dates, indicating short-term positions.

For instance, buying a bond close to maturity is considered a near term bond purchase. The exact duration covered by the expression varies—some might consider this period anything less than a few months, while others, like day traders, might narrow it down to minutes.

In economics, it comprises the short-term outlook of key indicators like GDP, inflation, consumer spending, or labor costs. For instance, the Federal Reserve monitors weekly employment data as near term information to introduce potential interest rate policy changes.

In legislative and business contexts, it can refer to impending or active periods. For example, a business quarter is often considered the near term because it spans the next three months. Similarly, a business preparing to launch a product or marketing campaign in the next few months is undertaking a near term initiative, even if the groundwork has been ongoing for a more extended period.

Applications In Finance and Business

This term has various applications in finance and business due to the effects it can have on business results and policies.

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#1 – Finance

  • Investment Strategies: Investors use this concept to make decisions about short-term and long-term investments. They may adjust their portfolios based on near future market expectations.
  • Trading: Traders, especially day traders and swing traders, focus on the near term to make short-duration trades and capitalize on short-term price movements.
  • Risk Management: Finance professionals assess short-term risks using this perspective to protect their portfolios and investments.
  • Market Analysis: Analysts use this expression to make predictions and provide insights into short-term market trends, asset prices, and economic movements.
  • Communications & Financial Disclosures: When used by finance professionals, it conveys the timing of events, forecasts, or investment horizons, enhancing clarity in discussions pertaining to returns, financial planning, and investment growth.

#2 – Business

  • Strategic Planning: Businesses often differentiate between immediate and long-term goals when developing strategic plans. The goals expected to be achieved immediately may focus on immediate growth, cost reduction, or product launches.
  • Budgeting: Financial forecasting and budgeting help businesses allocate resources effectively and monitor cash flow over short timeframes.
  • Product Launches: Businesses preparing to introduce new products or services shortly must manage marketing, production, and distribution efforts for a successful launch.
  • Quarterly Reporting: Publicly traded companies provide quarterly financial reports, which represent the immediate future and are closely watched by investors for performance insights (reflecting decline or rise in a specific short period).
  • Operational Decision-Making: Managers often make day-to-day decisions with a near period impact, such as staffing, inventory management, and pricing adjustments.

Examples

Let us look at some examples to understand the concept better.

Example #1

Imagine a day trader named Alex specializes in the stock market. Alex is currently analyzing Company XYZ’s stock, which is on the verge of releasing its quarterly earnings report. The earnings report is scheduled for publication after the market closes that day. Given Alex’s status as a day trader, his primary interest lies in short-term price movements.

In this scenario:

  • The immediate future pertains to the time frame encompassing the present moment and the conclusion of the trading day.
  • Alex’s trading strategy revolves around buying or short-selling Company XYZ’s stock based on his short-term predictions regarding how the market will react to the earnings report.
  • Alex anticipates that if the earnings report surpasses expectations, the stock prices will likely experience an upswing in the upcoming short period. Consequently, Alex plans to purchase shares before the market closes.
  • Conversely, if Alex foresees a disappointing earnings report, he may decide to short-sell the stock, aiming to profit from a potential near term price decline.

Example #2

Suppose Maria, a bakery owner, is devising a business strategy for the immediate future. She knows the holiday season is important for business growth.

In this scenario:

  • She decides to focus on an immediate future goal of increasing sales during the upcoming holiday season, which includes Valentine’s Day and Easter. Hence, the months of December, January, February, and March are considered near term in her case.
  • To achieve this goal, she plans to introduce a new line of holiday-themed pastries and cakes, invest in targeted marketing campaigns, and hire additional staff to handle the anticipated increase in orders.
  • Maria closely monitors the financial projections, inventory levels, and customer feedback during this period to ensure the success of her holiday sales strategy.
  • After the holiday season concludes, Maria shifts her attention to long-term planning, such as expanding the bakery menu and considering the possibility of opening a branch.

In this example, the near future term serves as a specific timeframe within which Maria plans to achieve a particular business objective.

Near Term vs Short Term vs Long Term

The differences between near term, short-term, and long-term are:

  • The primary difference lies in the duration. Near term is the shortest, short-term is intermediate, and long-term is the longest.
  • Near term emphasizes immediate or imminent actions and events, while short-term involves achieving goals within a relatively brief timeframe. Long-term focuses on long-range planning and sustainable outcomes.
  • Generally, near term decisions are associated with lower risk but potentially lower rewards; short-term decisions involve moderate risk and rewards and long-term decisions often carry higher risk but the potential for substantial rewards over time.

Frequently Asked Questions (FAQs)

1. What is the near term in economics?

It holds great importance in economics, given how interest rates, production costs, inflation, unemployment rates, capacity utilization, consumer price index, and other key economic parameters are interlinked. Since a change in the dynamics of these indicators can induce changes in economic conditions, analyzing the near future term in economics is crucial.

2. Is a near term strategy in stock trading beneficial?

In stock trading, such trades mean making quick trading decisions based on expected or anticipated market movements. This is done to benefit from the opportunities the volatility in a market presents to earn quick gains. It is important to note that such trading is risky, and only seasoned traders and investors usually undertake these activities.

3. Is a near term strategy relevant while purchasing mutual funds?

In the context of mutual funds, investors can invest for a period of 1 to 3 years. For liquid funds, the NAV computation period is 365 days.

This article has been a guide to Near Term and its meaning. Here, we compare it with short term and long term, explain its examples, and financial applications. You may also find some useful articles here –

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