Short term trading is a common strategy used by both users of online and traditional trading platforms. As with any financial system, short term trading has its pros and cons. The significant difference between short term and long term trading is the duration of trading.
Short term trading ranges from days to weeks, while long term trading can last for months or even years. A lot of traders practice both short term and long term trading on various trading platforms.
Short term trading has its risks and advantages. Financial products that are suitable for short term investments include :
- Treasury bills: These are owned by the government and are not prone to marginal fluctuations in the trading market. These products are auctioned, and the profit to be made is determined by the final auction price.
- Commercial papers that have short maturity periods and are traded in the stock market.
- Equity shares
- Certificate of deposit
1. You can make huge amounts of profits in short periods.
High auction prices for treasury bills can earn you a lot of income. An increase in the margin of other financial products can also leave you smiling all week long!
2. Money spent per transaction is lower compared to long term trading.
With long-term transactions, you’d pay higher amounts of money to obtain the products, while short term investments can be in lower quantities hence the lower cost.
3. It can easily be liquefied hence its flexibility.
Short term trading occurs for a short while and is convenient for people who need to liquefy their already obtained products.
4. Fixed income sources from treasury bonds,
certificate of deposit, and other fixed-income products. Fixed income products pay traders a fixed amount of interest till maturity date. After that, traders will be paid their principal investment amounts upon maturity
5. Negligible risks from investing lesser amounts of money.
1. The use of margins
This can be both beneficial and risky. Marginal increases imply more gains, while marginal decreases can make you lose investments.
2. Cost of trading commissions
Short term traders, especially day traders, pay more commission compared to long term traders because:
- A) when there’s a margin increase, there is an increase in profit, and this profit will then be collected after a short time at a small percentage gain and
- B) more costs from the higher brokerage fees
3. It’s a win or loss affair
Short term traders of certain financial products either gain or lose, while with long term trading, there’s an opportunity for all traders to gain.
4. It can be stressful and time-consuming
You’d have to constantly monitor the market, market indicators, and stock news, which would take up a lot of time and effort.
There are risks and benefits to every trading form. You solely have to determine which one works best for you and your financial abilities.