Short Term Investing: What is it and how does it work?

Investors have two ways of investing, long-term or making a short-term investment, which may carry more risk.

Most of the investment literature focuses primarily on the long-term process of wealth creation. It mainly covers the construction of an investment portfolio, diversification and control of investment risk.

Long-term investing is primarily about taking advantage of long-term statistical trends while minimizing investment risk. The investment strategy in this case assumes an investment period of at least a couple of years, if not several. So what sets short-term investing apart?

 

Short Term Investment – ​​Definition

As a general rule, there is no consensus in the financial literature regarding the boundary between short-term and long-term investment. Over the years, this period has been shortened, as reported by, among others, Benjamin Graham and Warren Buffet.

Currently, the most popular definition of a short-term investment assumes that these are financial instruments that we plan to hold for no more than 12 months. Each instrument can be a short-term investment, not quite a long-term investment.

Short-term investment – ​​Motivation

Disadvantages of investing in the short term

Investing in the short term deprives us of the ability to smooth out the fluctuations in returns that occur with investing in the long term and the magic of compound interest. Due to the increased number of transactions, it also exposes us to higher brokerage commission costs. Why, then, do investors undertake this type of strategy?

market participants

Some market participants believe that they can beat the market and multiply their wealth quickly. This group is primarily interested in speculation: buying a bundle of financial instruments in the hope that their value will increase in a short time. The extreme group of these types of investors are players who treat the financial market like a lottery.

Another group of short-term investors are financial institutions that want to place excess liquidity in the market. They usually do so through money market instruments and debt instruments. This group also includes people who use term deposits.

How to invest in the short term?

choice of instruments

When we invest in the short term, we are forced to reject financial instruments with a low rate of return due to the amount of transaction costs. At the current level of interest rates, unfortunately, the brokerage fees will eat us a small profit.

To obtain a satisfactory increase in our capital, we must invest in instruments with greater volatility or use financial leverage. In this sense, the most effective instruments will be shares, ETCs, futures, options and CFDs. The last three groups allow easy access to the lever. In the context of short-term investments, cryptocurrencies are also worth mentioning.

Investment in ETC

ETC – Exchange Traded Commodities – are securities that certify the holder's right to a certain amount of raw materials, for example, gold or oil. They are a convenient instrument for investing in the commodity market, but they do not offer financial leverage by themselves.

Their advantage is that they do not have an expiration date. However, we will not find them on all stock exchanges; in many countries we are condemned to use foreign markets.

cryptocurrencies

Investing in cryptocurrencies, due to their high volatility in valuations, can be an effective investment in the short term. In your case, however, two factors must be taken into account:

1. Firstly, trade on a reputable exchange and withdraw funds to a private wallet as soon as we want to stop trading; in this way we will avoid losing our tokens in case of bankruptcy of the exchange.
2. Secondly, the cryptocurrency market is extremely unpredictable and volatility is so high that it is very easy to significantly reduce the capital invested in it.

Short-term investment in shares

When it comes to investing in stocks in the short term, the most volatile are those companies whose "to be or not to be" can depend significantly on a single event, such as the release of a game. Another example is companies with small capitalization, bankruptcy and low free float; in your case, a relatively small amount of capital can induce significant jumps in valuation.

The market is the emblematic place for investments and short-term speculation. Unfortunately, it also carries a great risk of losing a significant amount of funds, fraud and insider trading by companies often occur as well.

An example of a successful short-term investment: buying an X game in the hope of a successful game release. In this example, an investor could more than double his invested capital in a week. But if the game is flawed, defective, or not as spectacular as promised, the losses can be great.

investment in derivatives

futures and options

Due to the fact that futures contracts and options have a short expiration time, they almost fit the definition of a short-term investment. They do not require payment of the full value of the instrument, but only a security deposit; Thanks to this, it is possible to obtain high rates of return with a low capital commitment. In the stock market, we can invest mainly in currencies, indices and shares of individual companies through futures contracts.

CFDs

Contracts for difference (CFDs) are a much more convenient instrument from the point of view of short-term speculation. In your case, we place a bet with the other party to the transaction on whether the price of the instrument will go up or down.

With the help of CFDs, we can speculate on raw materials, currencies, indices and shares of some companies. In addition to a wider range of underlying instruments, the advantage of a contract for difference is a great deal of freedom in terms of possible leverage.

In short, if we want to achieve high rates of return by investing in the short term, we must take into account the enormous risk of losing our funds.

Edit This Article