Everyone who invests in the stock market has their own strategy, but while there are lots of ways to invest, most fall into one of two broad categories: long-term and short-term strategies. Each has their own pros and cons, requires a specific kind of knowledge, and has the potential for profit.
Short-term and long-term trading strategies are two sides of the same coin. Short-term strategies are all about taking advantage of every little dip and peak in the market, buying when prices are low, and selling when they’re high, AKA, stock trading. A trader might buy and sell multiple stocks on the same day, and typically holds on to a given buy for no more than 4 or 5 days. Long-term strategies are more about buying low, and keeping hold of the shares for a longer period of time, which may be weeks or months.
For a short-term trader, success hinges on a thorough knowledge of current and historical stock prices and trends. This kind of strategy is all about knowing when to enter the market for a given stock, and when is the best time to sell. Long-term traders don’t need to worry about what the market is like in the immediate term. For them, picking stocks that represent a solid future investment is the name of the game.
One of the biggest differences between short and long-term trading strategies is the amount of risk involved, and the potential profits that can be made. And on the other side of the coin, the potential losses that might be sustained.
Short-term trading tends to have a higher risk profile, but also a higher potential return on investment. The higher risk comes from the fact that the market is highly volatile on a day-to-day basis, with dips and peaks occurring multiple times within a single day. However, there’s a greater potential reward, because the profits that are made can be reinvested more or less immediately. The opportunity to compound your investments is much higher for short-term trading.
On the other hand, with long-term trading your investment isn’t subject to the same high degree of risk, because market volatility averages out over time. However, because there are fewer opportunities to reinvest your earnings, the ROI potential is lower.
Conventional wisdom holds that for new investors, a long-term strategy is best, because it’s a gentler introduction to the world of stock trading. This can definitely be a good idea to follow, but it’s also true that new investors are less likely to have the amount of capital that’s needed to realise significant benefit from long-term trading.
If you have only a small amount of capital to play with, it can be more beneficial to start with short-term trading, due to the profit-enhancing effects of compounding your investment. On the other hand, an inexperienced investor who ties up a small amount of money in a long-term trade is actually making a riskier investment, because their inexperience means they’re less likely to pick a profitable stock.
There’s really no objective answer to this question. Everyone has their own beliefs, and often the kind of method that’s most suitable for any individual depends mostly on the kind of person they are. If you love the idea of a fast-paced investment strategy that relies on quick-thinking and risk, you may enjoy short-term investing. If you prefer a more relaxed and steady approach, a long-term strategy might be a better choice.
