In this article, we will look at the key differences between Long-Term Investing and Short-Term Trading. The best way to start is by understanding what they are and the goals behind each strategy.
What is long-term investing?
Long-term investing is a strategy of investing that aims to achieve long-term growth and income by holding a portfolio of securities with a time horizon of usually one year or more. Long-term investors are less concerned about short-term fluctuations in price and more focused on the long-term potential of their investments.
Long term investing can generate a return from dividends and capital gains and will include various types of assets, such as stocks, options, mutual funds, and exchange-traded funds (ETFs).
What is short-term trading?
Short term trading is a type of trading that involves opening and closing of positions within a short time frame, ranging from seconds to days. Short term traders aim to profit from small price movements in the market, rather than the long-term growth of the asset.
Short term trading can be done using various instruments, such as stocks, futures, options and CFDs.
Now that we’ve established what they are, let’s look at the methods of the long-term Investor vs Shot term trader.
The long-term investors’ approach
Long term investors will often allocate more time and consideration into their investment by analyzing fundamental data such as financials, Management and Board composition, company plans and the global economic outlook. This is because, as we established earlier, their main goal is to benefit from the asset’s performance over the long term. They would like to get an understanding of things like how well the company pays dividends, how it allocates capital and what the potential for a rise in price is (capital gains) over the next few years.
As part of their risk management techniques long-term investors will consider risk hedging and diversification of assets. They will often look at instruments such as options or ETFs to achieve this.
Long terms investors will make very few transactions for the year and may or may not use price charts and technical analysis.
The short-term traders approach
Short term trading requires a high level of attention, focus, discipline, and risk management, as well as a good understanding of technical analysis and trading psychology.
The short-term trader (or trader for short) is less concerned with the fundamentals of the asset but rather relies heavily on the use of technical analysis and price data to capture what they perceive as the best areas to buy or sell in a short space of time. Traders will often take both sides of the trade by going Long (buying) or Short (Borrow a stock from their broker, sells it to the market in hope to buy it back cheaper as price goes down and return it)
To capitalize on smaller movements, traders will borrow from their broker to fund larger positions (this is called leverage). With these larger positions they are exposed to higher risk, but also able to achieve a higher reward. This is why for the trader risk management is paramount.
Short term trading can be divided into different styles, such as scalping, day trading, and swing trading, depending on the duration and frequency of the trades. Scalpers and Day traders will often execute thousands of transactions per year as they are in and out withing minutes and hours, while swing traders may be in the hundreds, given they hold for days to weeks. With this frequency of trading in mind, the transaction costs play a major factor.
Lastly, traders also require fast and effective execution facilities from their brokers. Delayed entries and exits can quickly add up and ruin the risk reward relationship of their positions while also causing missed opportunity and bigger losses.
These factors above, accurate price data, charting, leverage, ability to short, transactions costs and good execution are all things short term traders should consider when choosing their broker as it can make all the difference in their chance to succeed.
In conclusion, long-term investing and short-term trading are two different strategies of participating in the financial markets, each with its own advantages and disadvantages. Long-term investing is suitable for those who seek long-term growth and income, have a lower risk tolerance, and are willing to hold their positions for years. Short-term trading is suitable for those who have a higher risk tolerance, can monitor and execute their trades frequently and seek faster returns. Both strategies require a good understanding of the market, the asset, and the risk involved, as well as a clear goal and a plan to achieve it. Ultimately, the choice between long-term investing and short-term trading depends on the individual’s preference, personality, and financial situation.
