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A Beginner's Guide to Short vs Long-term Investing in India

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Synopsis:

Short-term trading aims for profits through market movements, requiring active management and a high-risk appetite. Long-term investing focuses on the growth of the company and wealth creation, involving lower risk and less time commitment.

Introduction

The Indian stock market is brimming with opportunities but it’s always hard to choose between trading and investing.  Is it better to look at earning money quickly or putting your money into stocks for a longer time? This article will discuss the main differences between short-term trading and long-term investment. Knowing these strategies may help you decide which one fits your financial aims, how much risk you can handle, and your time frame for investment. This blog aims to equip you with the knowledge needed to make informed decisions on your trading journey and enable you to choose between short-term and long-term investing.

What is Short-term Trading?

The short-term trading strategy stands for keeping positions for a brief time, usually from seconds to days or weeks. This requires a diligent study of charts and market indicators to spot opportunities to swoop in.

Here are a few common types of short-term trading:

  • Day Trading: Positions are opened and closed within a single trading day. Such kind of trading requires substantial time, discipline, and the ability to handle high-risk levels.
  • Scalping: Traders aim to gain from small price changes by rapidly entering and exiting positions, usually several times within a day.
  • Swing Trading: Traders keep their positions for some days or weeks, trying to gain from short-term movements in the market.

What is Long-term Trading?

Long-term trading, also called long-term investment, involves keeping stocks for much longer periods. This could mean holding stocks for years or even decades to gain from a business's general growth prospects and the probability of capital appreciation over time. Traders having such long-term views mainly make decisions based on business fundamentals like financial condition, future possibilities, and competitive edge rather than shot-period market changes.

Here are a few common types of long-term trading strategies:

  • Value Investing: This involves finding stocks that are presently undervalued in the market and could grow considerably over time.
  • Dividend Investing: This long-term investment method focuses on picking companies that distribute regular dividends to their shareholders. It offers a constant flow of income along with possible growth in capital value.

Feature

Short-Term Trading

Long-Term Trading

Investment Horizon

Seconds, minutes, days, weeks

Years, decades

Goal

Capitalize on short-term market movements

Benefit from company growth and capital appreciation

Risk Tolerance

High

Moderate

Time Commitment

Significant time is required to actively monitor markets

Lower time commitment, suitable for a buy-and-hold approach

Trading Strategy

Primarily relies on technical analysis of charts and indicators

Focuses on company fundamentals like financial health and prospects

Account Type

Require a margin trading account for some strategies

Standard trading accounts typically sufficient

Examples

Day Trading, Scalping, Swing Trading

Buy-and-hold investing, Value Investing, Dividend Investing

Suitability

Experienced traders comfortable with high-risk

Investors with a long-term perspective seeking to build wealth gradually

Short term vs Long term investing:  It's important to distinguish between short-term trading and long-term investing. Short-term trading means you buy and sell stocks quickly to gain short-term gratifications based on market trends.  Long-term investing is when you purchase stocks and plan to keep them for a longer time after considering the fundamentals of the company. 

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Advantages of Short-term Trading

Many people in India find trading for short periods appealing because it might offer them various advantages.

  • Quick Profitability: Short-term trading strategies focus on taking advantage of small price changes, and you can make money fast if these are done right.
  • High Liquidity: High liquidity is present because short-term trading means that you won't hold your positions for very long. This makes it simple to enter and exit trades.
  • Proactive Approach: Short-term traders adopt a proactive approach towards their investment portfolios. They keep a close watch on the market and often trade to try to take advantage of small changes in market prices.
  • Potentially Lower Capital Requirements: Some short-term strategies like day trading might require margin accounts, but others may not require a lot of capital initially relative to the trader's long-term investment goals.

Disadvantages of Short-term Trading

There are a few disadvantages that traders must keep in mind before trading short-term:

  • High-Risk: In short-term trading, the volatility of the market could result in a big loss for the trader if the market fails to move in the expected direction. When you buy and sell more shares, you have to pay a higher fee to your broker. This might decrease the amount of money you make from each trade.
  • Time Commitment: Being skilled in short-term trading means you are always keeping an eye on the markets, financial news, and other technical indicators. This can require a significant amount of time and effort.
  • Stressful Environment: Short-term trading necessitates quick decisions. There is also a chance of rapid losses, which turns trading into quite a stressful exercise. Making trading decisions based on emotions can further exacerbate such a situation.
  • Understanding and practicing: Strategies for trading over a short period usually depend on detailed technical analysis and understanding of market behavior. Investors who are just starting may struggle to learn these skills which are essential to consistently outperform the market.

Advantages of Long-term Trading

Many investors in India find that trading for the long term is a very attractive strategy because it comes with several important benefits.

  • Risk Reduction: When you keep stocks for a long time, you are better equipped to manage the rapid ups and downs of the market. Over many years, it has been seen that stock markets usually go up, which might mean big increases in value for those who invest with a plan to hold their shares for many years.
  • Less Active Control: Long-term investments require less active control than short-term ones. After researching and selecting the right stocks, you can hold them for many years without having to watch the market all the time.
  • Benefits of Compounding: Long-term investments give you an advantage in the form of compounding. Your investments increase in value, and then you get returns on those increased values, which makes your wealth grow faster as time goes by.
  • Higher Returns: Long-term investing plans, if executed with a well-diversified portfolio, might lead to higher profitability over time than short-term trades.
  • Relaxed Investment Approach: When you invest for many years ahead, it enables you to stay calm about the market. If you think about the future and not just the present, you do not have to worry so much when prices fluctuate.

Disadvantages of Long-term Trading

While investing for a long time can be a good way to make money, there are also some problems that investors need to think about.

  • Reduced Liquidity: Investing your money for the long term makes it less liquid. If you want to access your money, you might need to sell your stocks. Selling can take a while and sometimes means missed opportunities.
  • Missing out on Short-Term Opportunities: Long-term investors do not take advantage of the opportunity to make money from quick changes in the market that could bring high profits.
  • Market Volatility: The stock market is not always predictable, and people who invest for many years will certainly go through times when it goes down. Over time, the market usually goes up, but market volatility might require investors to stay emotionally strong.
  • Patient Approach: Long-term investments are similar to running a long race, not a quick one. You need patience to hold your positions during times of volatility if you want to reach your monetary targets.
  • Less Active Management: Long-term investments do not need daily monitoring. However, it is necessary to periodically look at your portfolio and make adjustments when you must. There will be some ongoing management, but it should be much less intensive than short-term trading.

Factors to consider when choosing between Short-term trading and Long-term Investment

To choose if you should adopt a short-term trading or long-term investment, think about your monetary objectives. Here are important questions you need to consider:

Risk Comfort: Trading in short time frames comes with more risk because the market moves quickly. Are you comfortable with the possibility of significant losses, or do you prefer a more stable approach?

Investment Period: If you trade for the short term, you will try to get quick gratification from the changing market trends. But if you invest with a long-term view, then the goal is building up wealth over many years. Consider your financial goals and when you might need access to your funds.

Time Commitment: Short-term trading needs a lot of attention and active handling. Can you allocate time for studying graphs, a high frequency of trades, and keeping up with the latest market information? Long-term investing allows for a more hands-off approach.

Investment Knowledge and Past Experience: Strategies for trading short-term usually depend on complicated technical analysis. Do you feel at ease with these ideas, or do you prefer a more fundamental approach towards investing?

Financial Goals: Do you want to make money fast or save up for the future? Trading in a short time can help add to your earnings while investing over many years is good if you're thinking about saving for when you retire or want to grow your wealth.

Temperament: Short-term trading may cause stress because you need to make fast choices. Are you a disciplined investor who can keep away from making decisions based on feelings?

Strategies for Short-term Trading Success

For short-term trading to be profitable, one must have discipline and a clear strategy. Here are several important suggestions for investors in India:

  • Create a plan for trading: Establish the time frames when you will enter and exit trades, set up rules for managing risk, and decide on how to handle your finances. Follow this plan closely to prevent decisions based on emotions.
  • Learn Technical Analysis: Learn how to master technical analysis by studying charts, recognizing various indicators, and understanding their ability to hint at possible opportunities for trading.
  • Practice: Before you put real money at risk, sharpen your abilities and try out your trading strategies with a demo account that doesn't cost anything, provided by numerous brokers in India.
  • Stay Informed: Keep yourself aware of the financial news, announcements from companies, and patterns in the business sector that might influence the prices of stocks.
  • Handle risk with care: Always put stop-loss orders in place to control possible losses from trades. Do not use too much leverage in your account, and make sure not to invest all your money in a single option.

Strategies for Long-term Trading Success

Long-term investments are like running a very long race, and if you do it the correct way, you can create a lot of money. The following are some important methods that could benefit aspiring long-term investors:

  • Put money into reputable firms: Concentrate on financially stable businesses, have a record of good results, and hold potential for future success. Study their basic financial health, possibilities to grow, and the edge they have over competitors.
  • Create a varied mix of investments: It is not wise to invest everything you have in one company. Distribute your funds among various types of businesses and assets to reduce risk. Consider using exchange-traded funds (ETFs) for broader market exposure.
  • Hold onto a long-term view: Resist being influenced by short-term changes in the market. Maintain your plan for investing and steer clear of choices driven by emotions due to momentary market declines.
  • Adjust your portfolio from time to time: Look over your investments periodically and make changes if required according to the needs of the situation. This helps make sure that your portfolio stays in line with the amount of risk you can accept and what you aim to achieve financially.
  • Stay Invested: Keep your investments for a long time because the compounding effect grows stronger with time. It's better not to trade too much; instead, keep your focus on holding onto your investments for many years if you want the biggest gains.

Which is Better – Long-term or Short-term Investment?

When it comes to deciding between short term vs long term investing, the choice largely depends on individual goals, risk tolerance, and investment horizon. Long term investing typically spans over five years or more, allowing investments to weather market fluctuations and potentially reap higher returns. This approach suits investors who prefer stability and are willing to be patient for substantial gains. By contrast, short-term trading involves a shorter time frame, often up to three years, and caters to those seeking quicker returns, albeit with more exposure to market volatility.

Choosing between long term trading and short-term trading isn’t straightforward, as each has its pros and cons. Short-term trading can provide flexibility and liquidity, appealing to investors who want to seize rapid market opportunities. However, for those focused on building wealth gradually and minimizing risk, long term trading might be the preferable route. Weighing the advantages and limitations of each approach will ultimately help investors decide on the strategy that aligns best with their financial objectives.

Conclusion

The Indian stock market has many opportunities for people who want to trade short-term and also for those looking at long-term investing. To be successful, you must pick a strategy that fits well with how much risk you can take, what you aim to achieve from your investment, and your money condition.

You can generate a high return on investment by trading for a short period. However, this requires a substantial amount of knowledge, experience, and discipline to manage the higher risk. Long-term trading stocks is easier because it leads to wealth generation as and when companies inevitably grow over the years.

Regardless of your chosen approach, it's important to have a clear plan, do thorough research, and keep learning if you want to succeed in the Indian market. If you're just starting at stock trading, make sure to utilize features like demo trading accounts so you can improve your skills and feel more confident in yourself before you start dealing with actual money in the real market.

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

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Frequently Asked Questions

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What should a beginner choose to invest in – Long-term or Short-term?

Answer Field

For beginners, the choice between long term investing and short-term trading depends on their goals and risk tolerance. Long term investing is ideal for those who prefer stability and gradual growth, whereas short-term trading can offer quick returns but involves higher risk. Starting with long-term investments may be safer for new investors.

Which is more profitable, short-term or long-term?

Answer Field

Both short term vs long term investing have unique profit potentials. Short-term trading can yield fast profits, but it requires active monitoring and involves greater risk. On the other hand, long term trading often leads to higher returns over time, as it allows investments to grow with market trends.

What are the primary objectives of short-term traders compared to long-term investors?

Answer Field

Short-term traders aim to capitalize on short-term market movements for quick profits. Long-term investors focus on company growth and the potential for capital appreciation over extended periods.

What are the typical time frames associated with short-term and long-term trading?

Answer Field

Short-term trading involves holding positions for seconds to weeks. Long-term investing involves holding stocks for years or even decades.

How do short-term and long-term traders approach market research and analysis differently?

Answer Field

Short-term traders focus on technical analysis of charts and indicators to identify short-term trends. Long-term investors focus on company fundamentals like financials and growth potential.

 

Which is riskier short or long-term?

Answer Field

Short-term trading is generally riskier due to market volatility. Long-term investing aims to ride out market fluctuations, but downturns can still occur.

Is it better to invest long-term or short-term?

Answer Field

Consider your goals. Long-term investments suit building wealth gradually. Short-term trading might be suitable for generating supplemental income if you have the risk tolerance and time commitment.

Is it better to trade long or short?

Answer Field

There's no "better" option; it depends on your goals and risk tolerance. Short-term trading offers potentially quicker returns but carries higher risk. Long-term investments typically aim for steadier growth with lower risk.

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ADDITIONAL DISCLAIMER FOR U.S. PERSONS

Bajaj Financial Securities Limited is not a registered broker-dealer under the U.S. Securities Exchange Act of 1934, as amended (the"1934 act") and under applicable state laws in the United States. In addition, Bajaj Financial Securities Limited is not a registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended (the "Advisers Act" and together with the 1934 Act, the "Acts), and under applicable state laws in the United States. Accordingly, in the absence of specific exemption under the Acts, any brokerage and investment services provided by Bajaj Financial Securities Limited, including the products and services described herein are not available to or intended for U.S. persons. This email message does not constitute an offer or invitation to purchase or subscribe for any securities or solicitation of any investments or investment services and/or shall not be considered as an advertisement tool. "U.S. Persons" are generally defined as a natural person, residing in the United States or any entity organized or incorporated under the laws of the United States. US Citizens living abroad may also be deemed "US Persons" under certain rules.  

ADDITIONAL DISCLAIMER FOR CANADIAN PERSONS

Bajaj Financial Securities Limited is not a registered adviser or dealer under applicable Canadian securities laws nor has it obtained an exemption from the adviser and/or dealer registration requirements under such law. Accordingly, any brokerage and investment services provided by Bajaj Financial Securities Limited, including the products and services described herein are not available to or intended for Canadian persons.  

This mailer and its respective contents do not constitute an offer or invitation to purchase or subscribe for any securities or solicitation of any investments or investment services.  

DISCLAIMER FOR REPORT

DISCLOSURES UNDER THE PROVISIONS OF SEBI (RESEARCH ANALYSTS) REGULATIONS 2014 (REGULATIONS)

Bajaj Financial Securities Limited ("Bajaj Broking" or "Research Entity") is regulated by the Securities and Exchange Board of India ("SEBI") and is licensed to carry on the business of broking, depository services and related activities.  

This Report has been prepared by Bajaj Financial Securities Limited in the capacity of a Research Analyst having SEBI Registration No. INH000010043 and distributed as per SEBI (Research Analysts) Regulations 2014. This report does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable. This report is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this report should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult his own advisors to determine the merits and risks of such investment. The investment discussed or views expressed may not be suitable for all investors.  

This information is strictly confidential and is being furnished to you solely for your information. This information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Bajaj Financial Securities Limited and associates / group companies to any registration or licensing requirements within such jurisdiction. The distribution of this report in certain jurisdictions may be restricted by law, and persons in whose possession this report comes, should observe, any such restrictions. The information given in this report is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This information is subject to change without any prior notice. Bajaj Financial Securities Limited reserves the right to make modifications and alterations to this statement as may be required from time to time. Bajaj Financial Securities Limited or any of its associates / group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Bajaj Financial Securities Limited is committed to providing independent and transparent recommendation to its clients. Neither Bajaj Financial Securities Limited nor any of its associates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including loss of revenue or lost profits that may arise from or in connection with the use of the information. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein. Past performance is not necessarily a guide to future performance .The disclosures of interest statements incorporated in this report are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. The information provided in these reports remains, unless otherwise stated, the copyright of Bajaj Financial Securities Limited. All layout, design, original artwork, concepts and other Intellectual Properties, remains the property and copyright of Bajaj Financial Securities Limited and may not be used in any form or for any purpose whatsoever by any party without the express written permission of the copyright holders.  

We offer our research services to clients as well as our prospects. Though this report is disseminated to all the customers simultaneously, not all customers may receive this report at the same time. We will not treat recipients as customers by virtue of their receiving this report.  

Bajaj Financial Securities Limited and its associates, officer, directors, and employees, research analyst (including relatives) worldwide may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company(ies), mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company/company(ies) discussed herein or act as advisor or lender/borrower to such company(ies) or have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of research report or at the time of public appearance. Bajaj Financial Securities Limited may have proprietary long/short position in the above-mentioned scrip(s) and therefore should be considered as interested. The views provided herein are general in nature and do not consider risk appetite or investment objective of any particular investor; readers are requested to take independent professional advice before investing. This should not be construed as invitation or solicitation to do business with Bajaj Financial Securities Limited.  

Bajaj Financial Securities Limited or its associates may have received compensation from the subject company in the past 12 months. Bajaj Financial Securities Limited or its associates may have managed or co-managed public offering of securities for the subject company in the past 12 months. Bajaj Financial Securities Limited or its associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company in the past 12 months. Bajaj Financial Securities Limited or its associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past 12 months. Bajaj Financial Securities Limited or its associates have not received any compensation or other benefits from the Subject Company or third party in connection with the research report. Research analyst or his/her relative or Bajaj Financial Securities Limited’s associates may have financial interest in the subject company. Bajaj Financial Securities Limited, its associates, research analyst and his/her relative may have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of research report or at the time of public appearance.  

Research analyst has served as an officer, director or employee of subject Company: No  

Bajaj Financial Securities Limited has financial interest in the subject companies: No  

Bajaj Financial Securities Limited’s Associates may have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report.  

Research analyst or his/her relative has actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report: No  

Bajaj Financial Securities Limited has actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report: No  

Subject company may have been client during twelve months preceding the date of distribution of the research report.  

There were no instances of non-compliance by Bajaj Financial Securities Limited on any matter related to the capital markets, resulting in significant and material disciplinary action during the last three years. A graph of daily closing prices of the securities is also available at https://www.nseindia.com/

ANALYST CERTIFICATION

The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.  

RISK DISCLOSURE ON DERIVATIVES

  • 9 out of 10 individual traders in equity Futures and Options Segment, incurred net losses.
  • On an average, loss makers registered net trading loss close to ₹ 50,000.
  • Over and above the net trading losses incurred, loss makers expended an additional 28% of net trading losses as transaction costs.
  • Those making net trading profits, incurred between 15% to 50% of such profits as transaction cost.

SEBI study dated January 25, 2023 on “Analysis of Profit and Loss of Individual Traders dealing in equity Futures and Options (F&O) Segment”, wherein Aggregate Level findings are based on annual Profit/Loss incurred by individual traders in equity F&O during FY 2021-22.

BROKERAGE DISCLAIMER

All leveraged intraday positions will be squared off on the same day. There is no restriction on the withdrawal of the unutilised margin amount. Brokerage will not exceed the SEBI prescribed limit. Visit : https://www.bajajbroking.in/pricing

MTF 

As subject to the provisions of SEBI Circular CIR/MRD/DP/54/2017 dated June 13, 2017, and the terms and conditions mentioned in the lights and obligations statement issued by the TM (if applicable).  

US INVESTING

International investment is not supervised by any regulatory body in India. Thus, any claim or dispute relating to such investment or enforcement of any agreement/contract /claim will not be under laws and regulations of the recognized stock exchanges and investor protection under Indian Securities Law. The account opening process will be carried out on Vested platform and Bajaj Financial Securities Limited will not have any role in it.  

MARKETSMITH / GOLDENPI / SOVEREIGN GOLD BONDS

Bajaj Financial Securities Limited is only distributor of this product. These are not exchange traded products and all disputes with respect to the distribution activity, would not have access to exchange investor redressal forum or Arbitration mechanism. Bajaj Financial Securities Limited is not a registered Investment Advisory. User discretion is required before investing. Client is requested to independently evaluate and/or consult their professional advisors before arriving at any conclusion to make any investment. The decision to invest shall be the sole responsibility of the Client and shall not hold Bajaj Financial Securities Limited, its employees and associates responsible for any losses, damages of any type whatsoever. 

IPO 

This should not be construed as soliciting investment. Investors’ discretion is required. Kindly consult your financial expert before investing. No need to issue cheques by investors while subscribing to IPO. Investments in securities markets are subject to market risks, read all the related documents carefully before investing.  

SCREENERS 

Screeners is not Exchange-approved products and any disputes related to the same will not be dealt on the Exchange platform. 

SECURITIES 

Securities quoted are exemplary and not recommendatory. 

IPV 

Account would be open after all procedure relating to IPV and client due diligence is completed. 

IMAGES 

The images used are only for representation purpose. Proper due diligence has been done for the images and the image is not of any artist. The same is captured from royalty free sites. 

DISCLOSURE TO CLIENTS REGARDING PAYOUT OF FUNDS

As per SEBI circular no. SEBI/HO/MIRSD/MIRSD-PoD-1/P/CIR/2023/84 dated June 08, 2023, Stockbrokers are required to upstream the entire client funds lying with them to the Clearing Corporation. Based on client’s request the funds’ release request must be placed with the Clearing Corporation. Based on the internal process and cut-off timelines of the Clearing Corporation the funds will be released to the Stock Broker. In view of this new process, as specified by the regulatory and the cut-off time of Clearing Corporation/Banks processing the funds, Bajaj Financial Securities Limited cannot commit the exact time for releasing funds payout to its client. Clients are requested to note that, Bajaj Financial Securities Limited will not be responsible for any inconvenience caused to clients due to delay in release of funds payout, including fines, delayed charges, defaults, etc.