Home
Calculators
- Mortgage
- Taxes
- Retirement
- Debt
- Savings
- See all—over 100
Learning Center
About Us

What Strategies Are Used in Short-Term Investing?

Short-term investing uses techniques designed to maximize profits in a short time. Among these techniques are speculation and short-term trading. A speculator may purchase a security today and then sell it in a few hours or days to make a profit based upon the investor's guess as to what the investment is likely to do in the short term. If the investment fails to live up to the investor's expectations, then the investor may sell the investment at a loss to minimize additional losses by holding on to the investment.

Short-term investors also use techniques to leverage their investments and to take advantage of profits in a declining market.

Short-term investors also use techniques to leverage their investments and to take advantage of profits in a declining market. Leverage is a technique that multiplies gains (and losses) by using borrowed money in addition to one's own money in an investment. For example, an investor has $100 and borrows $100 to make a $200 investment that goes up 10%. The investor sells the investment and returns the $100 borrowed money. The investor keeps the $20, giving him or her a $20 profit. You do the math to see what would have happened if the investment had gone down 10%.

A short-term investor may borrow money from his or her broker by using his or her current shares as collateral. This reduces the amount of cash the investor has to pay up front, allowing the investor to buy more securities, hopefully at rising prices. This process is called buying on margin. Buying on margin is very risky. It can increase gains, but also losses. Furthermore, if the value of the investor's securities falls below his margin limits of borrowed funds, the investor must immediately make up the difference in the account.

Short-term investors may also sell short their securities. If an investor thinks a security's price will fall in the future (a down market in that security), he or she might borrow shares from a brokerage, sell them, and, hopefully, buy them back at a lower price than he or she sold them for. The shares are then returned to the brokerage, and the investor keeps the profit. However, if the share price rises, the investor has to buy them back at a higher price than he or she sold them for, taking a loss in the process.

Short-term investors look for strategies allowing them to trade securities quickly, leverage their profits, and make money in a down market. It does not always work out this way, though.