What Is Short-Term Investment ?
Short-term investment is a investing strategy in which assets such as stocks, bond, treasury bills, cryptocurrencies, forex, ETFs etc. are bought and sold within a short period of time (generally less than three years). The main objective of short term investing is to generate quick returns over a shorter time horizon.
Key Characteristics Of Short-Term Investments
- In this strategy investments are held for a short period generally les than three years.
- Because of high liquidity, investment can be converted into cash easily
- Short-term investments are less risky as compared to long-term investments
- It is suitable to meet short-term financial goals
Pros Of Short-Term Investments
The major advantages or benefits of short-term investing can be highlighted as follows;
1. Quick Profit Potential
One of the major benefits of short-term investment is that investors can make substantial profits from frequent price fluctuations. Active traders can make quick profits in short period.
2. Liquidity And Flexibility
These investments are more liquid than long-term investment because they can be sold or converted into cash easily. It provides investors the opportunity to grab new opportunities and change the strategy as per the changing market environment.
3. Ideal For
Short-term investment is ideal for active investors who can stay engaged, monitor market trends and make prompt decisions.
4. Less Risky
It involves lower risk because investment per transaction is lower than long-term investment
5. Avoids Long-Term Risks And Uncertainty
This investment protects investors against long-term uncertainty because business environment such as government policies, inflation, market condition etc. can be changed unexpectedly over the years.
Cons Of Short-Term Investments
Some of the major drawbacks or disadvantages of short-term investing can be pointed out as follows:
1. Lower Rate Of Return
Short-term investment gives focus on liquidity and safety, therefore, returns on investments are lower than long-term investment.
2. High Transaction Costs And Taxes
Another notable drawback of short-term investment is higher transaction costs. Because of frequent trading traders commissions, transaction costs and brokerage fees are high. It leads to decrease in the profitability. Short term capital gain taxes are higher than long-term capital gain in most countries. So, it increases the tax burden.
3. Not Ideal
It is not ideal for part-time investors or traders because it is time consuming and requires consistency, regular monitoring and proper research.
4. Pressure And Emotional Stress
It is more stressful than long-term investment that may lead to anxiety and burnout. So, it may not be suitable option for beginners.
