About Short Term & Long Term Investing

Investing is about making the most of your capital by loaning it to others. These "loans" take many forms including the two most common - stocks and bonds. Stocks are shares of a company's equity and bonds are debt certificates that are usually paid at fixed rates. Whatever you decide to invest in, timing is everything. When you invest and for how long is as important if not more than where you put your money. This article will help you understand the difference between short term and long term investing.

The Facts

Short-term investing is traditionally defined as any investment held for less than 1-year. It doesn't matter if you trade buy a stock only to sell it 7 hours later in a day-trade or hold it for 6 months - both of these are considered short-term investments.

A long-term investment is any investment held for more than one year.

Risk Factors

The time-frame for investing can have a big impact on investments for a variety of factors. It is widely accepted that long-term investment in a broad diversity of places is the most conservative and safest way to earn a return on your capital. Short-term investing in contrast, can be very volatile due to the many factors that determine a share price or interest rate.

As an illustration take a look at chart below. Over the long term, the investment gained a large amount, but short-term spikes (volatility) made the investment gain and lose value several times.

Significance

Besides gain or loss, the most important factor to consider when investing is taxes. The time frame has a significant impact on what is called capital-gain taxes. The tax code in the U.S. and many other countries is written to encourage long-term investing. The current capital gain tax in the U.S is up to 35% for most short-term investments. Long-term capital gains taxes range from 0 to 15%.

Expert Insight

Warren Buffett, a noted American investor once said, "In the short term the market is a popularity contest; in the long term it is a weighing machine." This can be interpreted to say that even if you make a good investment on solid fundamentals, it can still go down in the short term because of group psychology and techinical factors. Long-term however, investors find the quality companies and are rewarded.

Significance

Overall, short-term investing should be seen more as gambling (high-risk and unpredicatible). You really have to be an expert in market trends to do well with most short-term investments. Long-term investing is less risky, and though you might have to go through many periods of losses and gains, your overall investment will likely go up.

Resources

• Investopedia on Short and Long-term investing