In the trading world, every investor holds a different investment intent and has different investing capabilities, time horizons, and objectives when it comes to investing money. To meet the needs and goals of all these investors, there are various trading ways and the two most common of them are short-term and long-term trading.
If you are new to the stock market, choosing between these two can be difficult. Here, in this comprehensive guide, we will highlight the major difference between these two types of trading so that you can decide on the trading type that suits the best for you.
Understanding Long-term Trading
Long-term trading means holding an asset for more than one year. In long-term stocks trading, traders mostly hold a position in the stock market for a longer period, ranging from one year to several years to gain profit from the gradual increase in the value of the underlying asset by capturing its overall trend. Some of the well-known strategies of long-term stock trading are value investing, dividend investing, and Buy-and-hold investing.
Benefits of Long-term Investing
Some of the important benefits of long-term investing are-
- Compounding– By long-term investing, the trader can take advantage of compounding by allowing you to invest the dividends back in the financial market to earn increased profit.
- Time-saving– It is not time-saving in terms of years. Instead, here time-saving means that it frees the trader from the effort of constantly eyeing market fluctuations.
- Less stressful– While investing in long-term trading, the traders need not constantly monitor the market. Unlike the forex exchange market, the current prices of the stocks in the stock prices can be ignored. Instead, in this trading type, the traders need to focus on future market conditions.
- Saves taxes– It can also help you in saving taxes. Most of the long-term trading activities are charged at 5% to 15%.
Cons of Long-term Investing
The cons of long-term investment include the following-
- In-depth knowledge– In long-term trading, the traders need to possess an in-depth knowledge of the financial sector, particularly stocks.
- Chance of missing out- Since in long-term trading, traders need to invest the capital for a larger period, usually years, the traders can miss the chance to make a profit in times of volatility.
- Patience– Long-term trading demands a lot of patience and in case of failure to keep patient, traders can create problems for themselves.
Understanding Short-term Trading
In contrast to long-term investing where traders are held for a longer time, in short-term investing, the traders hold a position for a shorter time, ranging from days to a year. Usually, investors hold the position for a few days to a few weeks to gain benefit from the cost changes and unpredictability that occur between all these days.
Investors trading in the short term use specialized research, market trends, and technical analysis to make investment decisions.
Benefits of short-term Investing
Some of the important benefits of short-term investing are-
- Faster money-making idea– Since in short-term trading, the positions are held for a shorter timeframe, the traders can gain benefits in a short period. Some investors also earn profit within a day by investing in a type of trading called intraday trading.
- Short-term risks– In short-term investing, there is time to recover from a wrong decision wherein traders can exit a trade quickly and reinvest the capital to hold another position.
Cons of short-term Investing
Some of the critical cons of short-term investing are-
- Stress– The share market is highly unpredictable. Thus, it is difficult for traders to analyze the market to predict the future of the stock in a shorter time span. To reduce the stress, investors choose CFD trading as a better option.
- Time-consuming– It demands a lot of attention, meaning traders have to keep an eye on the market situations continuously.
Long-term vs Short-term Investing
The notable difference between the two is given in the table below-
| S. No. | Specification | Long-term investing | Short-term investing |
| 1. | Timeframe | involves holding positions for months to years. | involves holding positions ranging from days to weeks. |
| 2. | Tolerance of risks | usually have a lower risk tolerance. | have a high-risk tolerance. |
| 3. | Profit potential | offer the potential to gain profit from overall growth and appreciation of the asset. | offers the potential for more frequent and immediate profit. |
| 4. | Analytical methodology | heavily relies on fundamental analysis, and a thorough evaluation of economic indicators. | uses technical analysis, price action, and market trends. |
| 5. | Trading frequency | involves fewer transactions. | requires more quick exchanging action. |
Which is better?
Since every investor has unique risk tolerance and financial goals, which one is better between the two varies for everyone. However, there are certain factors to look for when choosing the one that suits you better and these are-
- Financial goals– If you are an investor who appreciates the value enhancement over a longer period, then long-term investors can be an ideal choice for you while someone looking for frequent gains, can choose short-term investing.
- Risk tolerance– If you are comfortable with the fluctuations in a short time, then you must invest through short-term investment, else long-term investment will be suitable.
- Time responsibility– Assess the time you can allocate to trading. Long-term trading involves fewer trades and less monitoring, requiring less time commitment. In contrast, short-term trading demands active participation and constant market observation.
Remember that investing in the stock market is prone to risks, so investors either investing in long-term or short-term need to understand the intricacies and different aspects of the market before investing.
