There are two main types of investing, passive investing and active investing. Short-term trading is a form of active investing. It is fast-paced and can produce greater profits in a shorter amount of time. Looking at the pros and cons of short-term trading can help you decide which type of investor you are.
A passive investor usually buys exchange-traded funds and mutual funds. Many of these funds are index funds that follow the entire market and the underlying index.
Passive investing is perfect for investors that don't have the time to find stocks on their own or are knowledgeable enough to be an active investor. Passive investors are not looking for hot stocks or the home run with a single stock. They take the long-term view that over time their investments will pay off.
Active investors take a hands-on approach to their investing. They actively research and analyze stocks before buying them. They make most if not all of their investment decisions whether to buy or sell a particular stock. One of the main benefits of active investing is the investor has control over all investing decisions instead of leaving it up to a fund manager.
According to the experts at Money Morning, 'Active investors are not limited to the restraints of a certain market. With expectations for future financial gains, they can make decisions that work best for them and forego those that may disappoint in comparison. There's no better way than actively investing to pursue what you want while avoiding mistakes others might have made before.'
The Pros of Short-Term Trading
Short-term trading is when an active investor trade's frequently, sometimes buying and selling the same stock on the same day. Short-term trading usually involves the buying of hot stocks or actively traded stocks. The pros of short-term trading include:
- Short-term traders can make more money in a shorter amount of time than a passive investor can.
- Short-term traders can control risk easier and faster by being able to quickly sell out of a position that has turned negative.
- The ability to sell quickly gives short-term traders the ability to quickly reinvest this capital on more trades, which has a compounding effect on profits. This works well for stocks that provide monthly dividends as well.
- Active investors have more control over the stocks they can buy versus a fund manager. This allows for more investment opportunities for the active investor.
The Cons of Short-Term Trading
Even though there are several pros to short-term trading, there are also several negatives. Anyone considering short-term trading should weigh the pros and cons. The cons of short-term trading include:
- Short-term trading can cost more when brokerage fees and accounting fees are factored in.
- It takes a lot of time and effort to be a short-term trader with many hours spent studying charts and watching each stock daily.
- It is riskier than passive investing, especially in volatile stocks or markets. One bad earnings report can quickly turn gains into losses.
Short-term trading is not for everyone. But for those that like fast-paced trading, the benefits of active investing can outweigh the negatives.