Compare and contrast short-term trading versus long-term investment

Short term trading refers to a strategy whereby investors buy and sell stocks, commodities and other financial instruments frequently, sometimes even in a day. These tradings are generally done for short term gains (quick profits) by exploiting price fluctuations. Here, investors take advantage of both rising and falling markets.

Whereas long term investment refers to a practice where an investor holds on to an investment for a long period of time like 5 years or more, while taking advantage of perks like interest and dividends. Here, investors seek larger returns over an extended period of time by building wealth.

Whether its Short term trading or long term investment, investors seek profits through market participation. Both strategies are important for a diversified portfolio. However, short term trading or long term investments differ in terms of capital commitments, time requirements, skills and personality traits, and potential profits.

Key differences between Short term trading or long term investment -

(a) Risk and return - In Short term trading risks are high but returns can also be higher. Traders need large investments to make substantials profits from small price fluctuations. However, in long term investment , the risk of price fluctuations is minimum. And there is a benefit of compounding in long term investment that can make a substantial difference between returns from long term investment and short term trading. This allows investors to invest small amount of money over a period of time.

(b) Analysis - Short term traders use technical analysis to predict / evaluate price movements. Here, the future value of a commodity is determined by using charts and historical patterns. But long-term investors apply fundamental analysis to know a stock’s intrinsic or real worth. Long term investors use financial metrics, earnings reports and ratios to do so.

(c) Commission - Short term traders do large number of transactions resulting in higher brokerage or commission costs for the trader. Whereas, such expenses can be insignificant in long term trading since they hold onto a single asset/position for many years or even decades.

(d) Type of assets - In short term trading, traders look for stocks with higher volatility, so that they can make profits through price movements. In long term investment, investors look out for good stocks with high growth potential and good management teams, so that they can grow and deliver good returns in the future.