Who Needs Short-Term Investment?
Jun 21, 2017 | 14:41 PM IST
Jun 21, 2017 | 14:41 PM IST
This is a republished article. We have updated few sections to make it more detailed & comprehensive.
Are you one of those who totally rules out short-term investment while planning investment? Generally, short-term investment is drawn with negative colours by financial planners and conservative investors. The primary reason cited against it is - that it poses an extreme risk to the capital. To some extent it is true. When you invest with a certain timeframe in mind, it automatically puts you under pressure. The pressure to get the desired results in the pre-determined time and the overbearing anxiety that comes along. Despite it being widely criticised, short-term investment is quite popular with the investors. Over the years, it has been creating wealth for investors through various investment instruments i.e. stocks, mutual fund (debt & equity), etc.
So, in a nutshell, it's a lucrative deal at the cost of extreme risk.
Technically, any investment that you hold for less than 1 year is considered a short-term investment. If holding period exceeds more than a year it becomes a long-term investment, eligible for Long-term capital gains. However, in investment, time is relative, some may consider 3 years as short-term while for some even 6 months' period is long-term.
Pros & Cons of Short-Term Investment
Like every other form of investment, short-term investment has its own set of pros and cons. From the quantum of returns to risk and reward equation there are plenty of points on which short-term investment locks horns with the long-term investment. Let's take a point by point look at the pros and cons of going short.
Instant Gains - In the stock market, a whole lot depends on how you time the market. It's a daunting task to understand the constant mood swings of the market, but if you manage to enter a stock at the right time (when it has bottomed out) then you are in for instant gains. In many cases, a certain stock goes down consistently but once it bottoms out then there is a fair possibility for it to start its northward trend. Those who enter the stock at this level get immediate upside on their investment.
High Risk - The core nature of the market is unpredictable. Hence, when you are timing the market, along with analysis there is a fair share of luck involved in the process. With the aid of technical analysis, one can understand the support and resistance levels of a stock which is a reliable method to a certain extent. However, if everything goes according to the plan it wouldn't be called the stock market. In case you misjudge the level and enter the stock and the stock continues its downward trend, your plan of instant profits can quickly turn into instant losses.
Pay More Taxes & Brokerage - As the short-term investors engage in constant buying and selling of the stocks they end up paying more brokerage and taxes. Brokerage in India is very high and to add to it there are various taxes and cesses which only increase the cost. The more you trade more brokerage you have to pay. Ever wonder why brokers pester you to do more trading? The brokerage firms earn more profits if their client trade more.
Miss Out On Multibagger growth - This is a big one. To experience the multibagger growth on any stock it is important that you hold it for a long period of time. When the return on a certain stock is in the range of 500% to 1000% it is called a multibagger. Any stock needs plenty of time to multiply its value. This time can be from few years to few decades. The very idea of short-term investment runs contrary to it. Thus, it is very unlikely for the short-term investors to experience the multibagger growth.
Types Of Short-Term Investment
The time frame of short-term investment varies from investment to investment. It can be a couple of minutes to a couple of years. In the same line, there are various investment instruments which are designed for short-term investment.
1. Intraday Trading - One of the most popular trading methods is intraday trading. In intraday trading the stocks bought have to be sold on the same day. It's an instrument for the day traders who monitor the market on the daily basis and see a trend or a pattern forming. They identify the entry and exit points and carry out the trade that starts and finishes in the same trading session. Day traders make enormous profits when the market is on the rise. The idea of intraday trading sounds exciting but it is extremely risky and can bring you massive losses if you misjudge the market.
A Word Of Caution It is advisable that only experts and professional traders should engage in intraday trading. Also, to safeguard yourself from the volatility of the market, one should not keep more than 10% of one's capital for the intraday trading. Exposing more capital can be extremely harmful to the investors.
2. Buy Today Sell Tomorrow (BTST) - When you buy shares you get the delivery on the third day from the day of the transaction. On some occasions, the price of stock shoots up on the following day but as the shares are not delivered that early in your DP account, is it possible to book the profit? Yes, it is. This type of trading is called Buy Today Sell Tomorrow (BTST). Here you buy the stock today and sell it on the next day before getting its delivery. BTST is usually opted for by the day traders who wish to hold their position long. In some cases, when the traders anticipate a drastic movement in the stock, they buy the stock and sell it on the following day.
3. Margin Trading - Margin trading is just like intraday trading only here you trade with the borrowed money. Most of the brokerage firms offer this service to their clients. For example, if you buy 100 shares of Tata Motors at Rs. 500, the actual cost of this trade would be (100*500) 50,000. However, if you get a margin of 15% you can buy the shares at just Rs. 7,500. In this scenario, the trader has to square off the trade in the same day or he/she has to pay the balance amount to the brokers if the trader takes a long position. Margin trading is mostly used for the intraday trades, hence, it is extremely risky and as you are trading on the borrowed money, you have to pay the money to the broker with interest in case you incur losses.
4. Position Trading - In position trading the trader gets the delivery of the stocks but he/she holds it only till the stock price reaches the pre-determined target. It's the buy-hold-sell method of trading. The holding period may vary from a couple of days, weeks, months to few years. It is safer compared to all the types we discussed above.
5. Futures & Options (F&O) - Futures & Options is different than all the trading types that we discussed above. In F&O, the trade is not carried out on the shares of the company but on the underlying assets which could be shares, commodity, etc. As both Futures and Options derive their value from the underlying asset, this type of trading is also called derivative trading. It is a contract based trading where a certain number of shares are traded in a lot for the pre-determined timeframe. In India, all the F&O contracts expire on the last Thursday of the month.
How About Multibagger Growth In Short-Term Investment?
It's an interesting point, can we experience the multibagger growth in short-term? Mostly, multibaggers stocks are associated with the long-term investment, as it takes a long time for any company to grow. However, in some rare cases, some stocks have multiplied their value in a very short time. Stocks like Indo Count Industries, Yes Bank, IndusInd Bank have become multibaggers in a rather short period of time. Certainly, their businesses were strong and they also got the advantage of being at the right place at the right time. Thus, it will be only fair to look at them as exceptions.
Expectation Management - The stock market functions in a peculiar manner. In the short run, the investors' sentiment plays an import role along with various other elements. Sometimes, the market sentiment supersedes the facts and fundamentals and as consequence, the prices of some stocks go unreasonably high. However, sooner or later, the market corrects and the inflated prices restore to stock's intrinsic value. As the short-term euphoria is subject to correction, it is not a good idea to consider it while planning your share market investment. Hence, it's best to set right expectations from the short-term investment. Short-term (period of 2-3 years) is still able to give you better returns than any other investment medium, but expecting multibagger growth from it would be grossly unreasonable.
The Key Question Is Short-Term Investment Good For Me?
It entirely depends on what kind of an investor you are. It's important to take into account your investing/trading habits before choosing your investment method. Here's an example which will illustrate this point better. Suppose you are a kind of an investor who knows how the stock market functions and have a good risk appetite then you can try your hand at intraday or BTST types of short-term trading. If not, then you should stay miles away from intraday trading. However, you can try position trading under the supervision of experienced investors or through the help of stock advisory firms.