What Is Short-Term Investing?

The objective of short-term investing is to make a larger profit in a short term than you can by holding an investment over the long term. This requires careful analysis and timing. It also requires discipline to buy and sell at the appropriate time.

One of the most common methods of short-term investing is active security trading. Trading is simply the process of one individual buying a security from another individual. Traders investing for the short term often speculate. Investors who speculate try to predict and profit from immediate price changes through buying and selling contracts or securities. Day trading is one of the most common forms of speculating. Day traders try to make money on daily price movements of stocks in the stock market.

Active trading and speculation lead to short-term gains and losses. A security's holding period is the amount of time you hold onto a security before you sell it. If you realize a gain or a loss on an investment you have held for 12 months or less, you are said to have incurred a short-term gain or loss.

Short-term investors often borrow money from their brokers using their current holdings as collateral. This reduces the amount of cash an investor has to pay up front, allowing the investor to buy more securities at rising prices. This process is called buying on margin. Buying on margin carries a lot of risk. It can increase one's gains, but also one's losses.

Short-term investors may also sell short their securities. This is the practice of borrowing securities from a broker that the investor thinks will fall in price, then selling the borrowed securities—selling short. The investor plans to buy back the securities at a lower price and repay the "loan." This technique is designed to make money in a falling market. But it fails if the market rises.

It is quite possible to earn large sums of money using short-term trading. However, the risks can be greater than those of long-term investing. Time generally reduces risk. Over the short term, investments such as growth stocks can be very volatile.

Not all short-term investments are speculative. Sometimes an investor may need to invest cash for a particular short-term goal. Buying short-maturity certificates of deposit or bonds may suit this purpose. Here the investor must balance risk and reward in order to be sure he or she will have sufficient cash for the goal. It is wise to consider your investment goals, as well as your risk tolerance, carefully before pursuing a short-term investment strategy.

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