Short Term trading refers to the stock market trading strategy wherein the time between the entry and exit of the trader is very short ranging from a few days to a few weeks. Short term trading is usually resorted to by investors who are looking to make a quick buck and do not have the patience to wait for a long time for creating wealth.
So basically you invest a large amount in a stock that is on an upward swing or you have the grapevine news or prediction from market dynamics that its price will rise, with the view to get your hands on a big chunk of money in a few days. Well it can very well be a jackpot for you but the point is, more often than not, it proves disastrous to your financial health. What one needs to see perhaps, and balance one against the other, is between the chance of a huge return vis-à-vis the cost of losing it all.
Why is short-term trading injurious to your financial health? The reasons are as follows:
The volatile nature of the stock market makes short term trading an extremely high-risk affair. Many factors such as company news, reports, a sudden political incident, legal change, etc can have a huge impact on the market in a span of a week or sometimes even a day, making your investment almost always at the mercy of the market or destiny as some might like to put it. The bottom-line is, short term trading makes you lose sleep every single night and your principal is always at the edge of being lost, and hence not very favourable for one’s finances. So on one hand where long term trading is far less risky, gives dividends with great capital gains, short term investments are more risky, less gain with more tax.
Short term trading tends to create a money mindset that is similar to gambling and so let’s your emotions get the better of you. So as a trader, you tend to put in too much focus on one single trade and it affects your entire decision making in the process. Then one negative and there’s an entire dominos effect on all your investments.
Time, Effort & Nerves
Though short term trading gives its share of chances for hitting the jackpot and making it big, but the amount of time, effort and most of all the nerves it takes to do that in order to give yourself a chance is overwhelming.
Difficulty of Scaling up
Compared to leaving your investment in the broad market over a long period with a future of gaining guaranteed returns along with hefty capital gains and reinvestments, short term trading is more about shorter gains in shorter terms. Hence, the aspect of scaling up your investments gets largely affected in this type of a trading.
As a conclusion it can be said that short term trading can only be done safely with money that you are investing that you are ready to lose. If you want to really make your investment count and give you a solid return, than long term well planned investment is the way to go.