At times, you may be losing your patience and become frustrated over the performance of your invested stocks. This is obvious. Like many of you, I also do that. Oftentimes, you would also be thinking if you could put your money in elsewhere like real estate or other better option of investment vehicles instead of stocks. But once you start familiarizing with the stock market more, this type of frustration and anxiety can be alleviated. And before investing in the stock market, it is important to keep in mind the difference between long-term investment and short-term trading.
It is needless to say that there are people who often rush to stock trading as a means to make some quick bucks. This is a riskier option for investors. It would be the best if you formulate a well-thought-out plan well in advance. It’s a must, if you are really interested in accumulating cool funds over a longer period of time. For this, you need to figure out some highly rated company’s stocks and put your extra money in such stocks in a SIP fashion. For this, you need to wait patiently for the stock price of your chosen company to correct and buy your selected stocks on every dip at important support level. After all, you are saving your hard-earned money for future needs or retirement time and so on.
I have one instance where an acquaintance of mine had truly made a fortune by investing some of his extra money in an Indian blue-chip tech stock, Infosys Technologies Ltd a decade ago. Then forgot about it. Over the years this stock gained unbelievable incremental value. He also bagged in stock dividends and several bonus shares. This is because of its innovative business model and the magic of compounding.
How do you define Short-term Trading and Long-term Investment?
Long-term investments are those instruments where you intend to hold them for several years. In the case of short-term trading or investment, you usually hold stocks for one year or less. Some experts, however, explain the time period in different ways. In stock investment, both short term and long term investments come with inherent risks attached. And therefore nothing is truly guaranteed in the stock market. Today could be very good and tomorrow very bad resulting in great gains or great losses as the case may be. According to some statistics, sizable long-term investments that are over twenty years of holding period have failed to give meaningful return too. The average returns that have generated only meager about 10 percent and these accounts all have a broadly diversified portfolio of stocks.
When you invest in a stock with an intention to stay invested for many years, you are definitely expecting your investment to increase in value. On top of it, you may be expecting for your investment to provide dividend income. When you invest in stocks for a short-term basis, this value addition may not be your top priority like return you expect from the long-term investment. For short-term trading, you may follow the simple rule “Buy it Low and Sell it High” Whatever may be your purposes of investing, you always expect a good return on investment (RoE) that can surpass any other viable options.
How Time Frame Be A Determinant Factor:
You might have different investment criteria at different period of your career. At the start of your career, you seem to be more aggressive and want to diversify. Even stock trading such as positional or swing trading may be in your priority list for meeting your short-term needs. Your short-term needs could be your down payment or EMIs on your home purchase, vacation expenses, car or bike purchase. While the long-term investment could be intended for your retirement life.
Whatever may be your intention; all your investments carry some sort of inherent risk. One of the biggest risks associated with long-term investments is the volatility in the market. The fluctuation and turmoil in the financial markets these days are the major cause of concern for losing the value of your investment. You never know what is in store for you in near future. Sensing this, I start reducing my portfolios of not-so-prospective stocks and switching to positional or swing trading, even to day trading. Although I am not recommending that you should go for short-term trading or investment always. As an investor, you’ll probably need a mixer of long-term and short-term investment in high-quality instruments. By knowing the differences between short-term and long-term, you at least have a good idea of what to expect from your investments. And with sound knowledge and proper education, you can help make those choices that are right for you.
Why You Should Not Invest With Your Essential Fund:
A profound rule is that if you are going to invest the essential money that you may need within a short period for your children’s education, or purchase of home anytime in the next five years then stay away from stock investment at all. This is because you never know when a stock market crash will strike. And you may trap in a stock for a longer duration. Another important point to note is that unless you are an active trader, short-term trading or investments make no sense. If your funds being used are for retirement life then being an active trader is also not recommended.
The average downtime for stock markets is a year, but you never know anything definitely. Many a times this has been seen to last much longer. And for a long-term investor this downtime may seem to be a lifetime. But if you are a short-term trader or investor, you may lose a lot depending on the market fluctuations. Stock investing will offer many great opportunities, but can be devastating at the same time for a short-term investor. And unless you acquire proper knowledge and education, you should stay away from stock market. If you know that the funds you are about to invest will be required for future use in a short time then choose investment options that are more secure and protected. It is true that you may get lucky sometimes and make a fortune, but it is also true that the risks are high and that you can lose everything.
Why To Avoid Short-term Trading, If You Are A Newbie:
However, the short-term trading or investing is also very risky. The stock market goes up and then down all the time aligning with the current economies. So, if you are thinking and switching to short-term trading, then this may not be the best option for you. Specially, when you are nearing to your retirement age and start investing in stocks. The best option in these cases would be to save you from, by the best inflation protection, rather than put you in the high exposure of risks to stocks investing.
If you want to play safe, you really need to invest in stable investments such as high-class bonds, mutual funds, and other cash instruments. This way you can lessen the risks of your investment fund. But if you want to make your investment manifold, you have the option to try a bit riskier route of stock investment. And the cool thing about stock investing is that it can off-set the notorious inflation when invested in the good quality stocks. These stocks should have strong earnings, innovative business model, and excellent managerial skill.
Oftentimes, sizable portions of investors have not that kind of patience to stay invested so long. And they want to see their investment manifold in a short period of time. So they are always looking for opportunities to double or even triple their money in the shortest possible time. I too fall in that category because I am having that characteristic. So you need to decide to choose from available options outlined above as per your risk tolerance before investing in the stock market.
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