In the balance of payment account, short term capital refers to that foreign capital which is short term in duration and is quickly mobile across countries. Short term capital is also known as hot money. Major short-term capital flows are banking capital or deposits into banks, derivative investment into the equity market, external debt to be repaid within one year etc. Investment made by foreigners in domestic shares are considered as long-term capital in the accounting sense. But practically, they are the most volatile form of capital and they can be considered as short-term capital. A major disadvantage of short term capital is that foreign investors in developing countries withdraw such capital when the host country faces some macroeconomic problems. This withdrawal in mass can itself deepen the crisis.
