Investment in Stock Market can take either of the two forms.
You can be a short term investor in the stock market or else you can be a long term investor in the stock market.
When an investor invests money, in the stock market for short term gains he is referred as Short Term Investor or better known as traders.
While, when an investor invests money in the stock market for long term gains he is termed as Long Term Investor and sometimes also referred as buy-and-hold investors.
Both these investment strategies have their own advantages and disadvantages and choose one investment strategy over other does not make you a better investor. Rather you should choose an investment strategy depending upon the time you have free and the fund available with you for investment. That said, the results you get in the short term investing or long term investing are quite different.
So let us understand both these investment strategies in detail so that you can choose that which best suits your requirements and investment goals.
Who is a Short Term Investor?
An investor is termed as a Short Term Investor when he holds any particular stock for less than a year. The investment angle comes when he trades the stock rather than by keeping the stocks with himself. The margin of profit that is derived by selling the stocks is often lucrative but at the same time short term investment is highly risky.
One has to figure out the precise moment when to enter and when to exit a stock position. One has to be an experienced trader and well versed in technical analysis of stock so as to figure out that a particular stock will yield profit or whether it will give out loss. As a short term investor, you are required to keep a watch on the moving averages. You have to develop an understanding of investing patterns, and should be able to analyze the stock market trends so as to make gains by trading the stocks.
In the context of short term investment, Day Trading is a common practice followed by most of the short term investors. In Day Trading, Investment is held for less than a day. Stocks are bought and sold within a day with a perspective of making profits by trading them. Day Trading is a difficult skill to master and takes a lot of time, study, and practice so as to make profits by trading the stocks within a day.
For short term investments, there are two most important prerequisite that you have to fulfill. Firstly, you require a lot of capital in order to make a good amount of money. Secondly, you should have a lot of free time. Most short term investors take to short term trading as a full time job. As a short term investor, you should possess excellent money management skills.
You should use stoppage points to make sure that you do not end up losing too much money. Short term investors tend to buy hundreds of stocks of the same company. As a typical example, short term investors can buy stocks worth $5000 to $25000 and wait for stock prices to appreciate by 1%. They then sell stocks, and in the process make a good return as they have invested a good amount of money in stocks.
Who is a Long Term Investor?
A Long Term Investor invests in stocks for a minimum period of one year. They are usually referred as buy-and-hold investors and generally stay invested in the stock market for a period which may range from five to ten years and may even be go as high as twenty to thirty years.
So long term investors demonstrate patience as far as their investment period is concerned. Such investors are not influenced by short term market volatility. Their investment strategy is based on the belief that they will get a good rate of return from the stock market over the long period.
Typically most of the Brokerage firms come out as long term investors and invest in the stock market for a minimum period of one year. Long term investing is not seen as “get-rich-quick” strategy, and if you invest wisely, you can expect to amass good wealth at the time when you decide to sell your stocks.
Long term investing is considered a good investment option for people who do not have enough time to research on investment opportunities. They already have a full time job and cannot devote much time towards researching on stocks and market situation. Long term investors have to focus on fundamental analysis rather than dealing with technical aspects of stocks and stock market. Even persons who do not have strong financial situation and are inexperienced in dealing with investments can take up long term investing. They just have to hold their stocks for a long period and should not be panic by the occasional fluctuations in the stock market. Having said that many professional and experienced investors have adopted long term investment strategy. Even Warren Buffett, the world famous American investor, believes in the long term investing.
Long term investments involve fewer trading fees as the stocks are held for a long period. A viable long term strategy would be to buy out stocks of companies who have a proven track record of stability and growth. Your investment is less risky if you buy stocks of companies with a proven track record. You can even choose stocks that pay out dividends on a regular basis. For new investors, long term investment is definitely better than watching day to day fluctuations in the stock market. However, it is not necessary to buy a stock and hold it for twenty years. You always have the option of adjusting your long term investment strategy depending upon the company situation or market situation as a whole.
So you see that being a short term investor or long term investor depends upon your risk taking ability and your experience and expertise in stock investment. Potentially short term investment is speculative in nature. You need to devote much of your time in the stock market analysis when doing short term investment. Whereas in Long Term Investment you only need to do fundamental analysis of the companies in which you want to invest. Even one hour per month will be enough to take stock of your investment. In long term investment, you need not worry about the occasional fluctuations affecting the stock market.
So depending upon your investment goals, your knowledge about stock market and most importantly your risk taking ability, and the amount of capital you have at your disposal, you should adopt short term investment or long term investment.