Short-term investment stocks usually are trendier and news driven, they make significant gains in a small period of time. It attracts traders with high risk-high return profile.
Trading in short-term stocks is relatively riskier than investing in long-term stocks. It involves lot of research to take more informed, efficient and profitable decision for trading intraday.
It is suitable for active traders who can monitor stocks throughout the market hours.
Pros and Cons of Short-term trading
There are many success stories, but the truth of the matter is that people also lose money on intra-day trading. In case of intraday trading, you will be doing a lot of transactions and thus will have to pay the brokers a good amount of the profit, if any.
- The main advantage of short-term trading is their growth potential in a short period of time. You can make money faster as it allows you to actively participate in the market. It can give you more control over your money as you buy and then sell within a short time period.
- Short term trading has a compounding effect on overall profits i.e. you can re-invest your capital by making more trades.
- You can control your risk by closing your positions overnight so unexpected market changes will not affect your profits.
- Day trading is considered a risky trading style. A volatile stock market can make a dramatic change to your investments. There are chances, you can lose a significant amount of money in a very short period of time.
- It is really unpredictable to figure out where the stock is heading which can lead you to a stressful situation.
- It demands a lot of attention, you need to sit in front of your computer for a number of hours a day looking at your charts. Technical charts are extremely complex in nature and it requires lot of hard work.
Costs attached with short-term trading:
Effective returns are different from the returns you are making from short-term trades.
You need to calculate effective returns after deducting overall costs attached. There are generally lots of in-between costs included when you perform any single trade such as brokerage, service tax, etc. These costs differ from the broker to broker and exchange to exchange. (See the example of how to calculate effective buy price and effective sell price of the stocks.)