No trader enters global markets without a goal. The goal for many investors is the same: they are willing to catch trading opportunities. Yet each trader can have his or her own way to achieve it. Some prefer to choose long-term strategies and are ready to wait years for a potential capital appreciation. Others opt for short-term investments and perform several trades during a shorter period of time in order to take advantage of small price movements. This article will shed light on the latter. We will help you to find out how investing short-term works.
The financial world nowadays is dynamic and even somewhat chaotic. That is why short-term investments are so popular today. While investing for a short time, traders can build up their confidence that the market will not experience drastic changes that can harm their funds.
Short-term and long-term investments
Novice traders may find it challenging to tell what short-term investments represent. For someone, holding investments for two years may be short-term. For others, it may seem almost like an eternity, and they may consider it as long-term. Sure thing, the whole thing with the timeframe for investments is relative. However, we will try to determine it by comparing short-term and long-term investments in a general sense.
Let’s start with long-term investments. The timeframe for this type may vary from several years (typically, over five years) to several decades. Traders who invest their funds for the long-term are usually focused on stocks, bonds, precious metals, real estate, etc. Long-term investors know that they are taking serious risks seeking for higher returns.
They also need to hold a considerable amount of capital to afford to stay in the game for a long time, taking into account the unpredictable changes on the market due to political and economic turbulences that may happen during this time.
So now, let’s see what short-term investments are. This type of investment is prevalent in more liquid and volatile markets. Short-term investors can hold an investment and wait for 3-5 years before they decide to sell or convert it to cash, or they can buy and sold an asset within a single day to take advantage of small price movements. While you can generate profits in a short period of time, this is not always possible, since short term investing strategies can entail significant risks that result in high losses. Investing short-term requires careful attention in some cases. Usually, it concerns day trading or scalping strategies. These approaches imply a significant degree of speculation.
What are the examples of short-term investments?
Individual or professional investors who opt for short-term investments use different types of securities in their strategies. There is no right answer to which one is the best. Traders choose those instruments they are comfortable dealing with. Some of the examples are as follows:
- Treasury bonds are government debt securities (mostly in the U.S.) with a fixed interest rate that offer a steady income each half year. They are considered to be more predictable financial instruments that help investors to mitigate the risk of default.
- Bond funds or debt funds are the financial instruments that allow traders to receive income each month. They require traders to make a minimum investment to start generating profits. Bond funds are suitable for both long-term and short-term investments. However, short-term ones are sometimes safer.
- Certificates of deposit are financial instruments offered by banks or credit unions. It is a safer way to generate profit that provides a high interest rate. One of the main conditions for it is a large deposit that should remain untouched for an agreed period of time.
- Municipal bonds are debt securities provided by local governments that allow investors to generate profit that is free from taxes, but taxable under certain circumstances. The risk of default is low for these financial instruments. However, short-term investments with municipal bonds may be vulnerable to economic turmoil.
- Savings accounts help investors to put a specific amount of their income aside from their expenses at a compound interest, meaning the interest rate will grow over time. Owners of savings accounts cannot withdraw their funds for daily expenses but in case of emergency.
How do beginners invest short-term?
Short-term investments can also be connected to derivative financial products. It is an accessible way for beginners to enter global markets and invest in various assets, such as commodities, Forex, indices, or stocks. Contracts for difference are popular derivatives. A broker and a trader set up an agreement for buying and selling a CFD on a selected asset. They agree on paying the difference between the prices at the moment of opening and closing a trade. With CFDs, trader has no rights on the actual underlying asset but can benefit from its price fluctuations.
Novice traders go for CFDs since the initial investment is usually low. Plus, CFDs are leveraged products. Leverage help to increase buying power. Many brokers offer to make a $250 deposit, and if your trade comes with the 1:2 leverage, your broker will add buying power to your trading account.
Then you can open a position, predicting the direction of price movements of an asset. If your prediction is correct, you receive profit, and leverage magnifies it. But if not, you experience losses, which are also increased because of the leverage.
Short-term investments with derivatives are a risky practice and you should consider whether you can afford to take the high-risk of losing money. That is why traders come up with various strategies that help them to adjust to market behavior. Especially when we are talking about the Forex or crypto markets that are extremely volatile and liquid. Prices may change every second there.
These are some of the common trading strategies for short-term investments:
- Day trading
- Swing trading
- Momentum trading
- Range trading
- Position trading
- Trend trading
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