Investing: Long-Term vs. Short-Term

Since the birth of the stock market there exists a philosophical difference in how investors use the market to make money. On one hand there are the short-term investors who see value in riding a given stock on its way up, and then selling at a nice profit. The other investor does not look at short-term ups and downs of a given stock, rather at the long haul view of several years. Neither view of how you should invest is wrong or inferior, they just differ greatly in how you buy and sell. Both investment approaches can make great gains in the market when applied properly; they can both lose you a lot of money too. Whether you are in it for the short-term or the long-term, we will explore the benefits and drawbacks to each.

Video: Warren Buffett – Long Term Investing

Short-Term Investing

Short-term investing is best often left to the experienced investors. There are a lot of dangers in short term investing, some obvious and some more obscure, that can wipe out your profits and capital investment quickly. To play in this game, you have to have nerves of steel and the ability to stay literally on top of your stocks. You will have to monitor your stocks on a daily basis to check rises and falls. These ups and downs will be the difference between you making a profit, and you losing your investment. Successful short-term investors typically follow this model for investing:

In-depth stock analysis.

Heavy research into the company you are investing in. More than a cursory glance at ratings and ratios, you need to know what this company is doing. New products, sales growth or decrease, personnel changes, etc. These specific company movements can be strong indicators of stock performance.

Setting a profit goal.

Too often investors see a stock surge and ride the stock all the way up, and then back down. To avoid this common mistake, set a sell price and stick to it. When the stock hits your comfortable profit margin, sell.

Setting a loss limit.

When a stock begins to tank, you need to at some point cut your losses and get out. Since you are only in for the short-term, you do not have the ability to wait years to see if your stock will recover. Set a limit for how low your stock can go. When it’s reached the limit sell.

Video: Short Term Trading

Investing for the Long-Term

Long-term investing is the norm for the average investor. It is a much less complicated and safer way to grow your money. While you won’t get rich overnight, you should see steady increases in your portfolio value over years. In long-term investing, you need not get overly anxious about hiccups in the stocks value, sudden jerks upwards or down. You will be looking at the bigger picture of you investment, and how your stock does say over 5 years rather than just a single quarter. To successfully invest over the long-term, follow these crucial steps:

Research your stock thoroughly.

Look at the company and how it stands. Cash holdings and debt are key. Also a long hard look at the company’s performance over the last several years. Look for a steady earner with good historical data.

Buy undervalued stocks.

Look at companies that are 25% or more valued below their 52-week average. This gives you the option to get in low, similar to buying “on sale” stocks.
Watch your stocks but do not make moves for sudden fluctuations. Once again set buy and sell limits, but make them more flexible with room to move around.

Potential Pitfalls to Investing

Whether you have chosen to invest short or long-term, there are inherent dangers to your money in each. With short term investment you must watch out for the hidden cost of your sales and purchases. If you are using a broker or online investment site, you are being charged for every purchase, and sometimes even on the sale. These fees come right out of your profit and can accrue rapidly when making many trades.

Also be aware of your tax liability with short term investing. Every profit you make will be counted as income by the IRS and you will owe money on it. Keeping your money in the market is a way to put off having to pay your tax liability, reinvesting the profits. With long-term investing, you really do minimize your potential risks substantially. The most common problem with long-term investors is simply not knowing when to get out. Don’t get to comfortable being a stock owner. At some point you need to take your profit out and move on, or risk the market going bear on you.

Two Different Paths to Wealth