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Short-term Investment Overview:
A short-term investment is an investment that will be converted into cash within a short period of time and is considered liquid. One of the objectives of making short term investments is to maintain liquidity as well as convenient cash flow. Short term investments are also considered as liquid investments due to their nature of readily selling and buying. In an established market, where the prices of the assets cannot be manipulated by a buyer or seller; and the assets are readily available for the access by the owner, the nature of assets are liquid.
The short-term investments are also termed as marketable securities due to their nature of quick selling and buying. Short term investments are made by the individuals, as well as companies in order to maintain regular cash flows in the business. The number, type and amount of short-term investment of a company, to some extent, defines its cash flows and cash position. Adequate short-term investments result in regular cash flows for the investor, thereby, broadening the scope for further investment in stocks.
Features of Short-term investment
- Short-term acquisition
As the name signifies, short-term investments are made for a concise period, say one year. One of the aims of short-term investment is to obtain a good return in a short period of time. The investors, both individuals as well as companies, usually invest in short-term investment options with the aim of selling it shortly. Moreover, many short-term investments mature within a very less time span.
- High Liquidity
Short-term investments are made for a very short period to get good returns. Moreover, short-term investments can be readily sold further in the market, mitigating the risk of illiquidity for the investors. Marketable securities are classified as a short-term investment as they can be readily converted into cash. Since the period of some short-term investments is very less, they ensure a regular flow of cash for the company as well as an individual investor.
Short term strategies for investors
Day trading strategies
Day trading is a common strategy used by short-term investors for getting good returns within a day. Day trading strategy underpins the investorâs interest in buying and selling the financial securities within the same day or even several times within a single day. In day trading the investor eyes for maximum returns within a day, however, there are also equal chances of losing the money.
Day trading is generally preferred by the investors depending on the potential return that an investment would give within a dayâs time. Day trading, however, demands fair knowledge of stock trading and the companyâs financial information to make an informed and sound decision. There are high chances that amateur investors might lose their money in day trading if uninformed and impulsive decisions for investment are made.
Day trading proves to be a lucrative option for the short-term investors eyeing for the gains through slight movements in the prices of the stocks. Moreover, day trading strategies have great potential when the investors are open to exploit the recurring small price activities. These price movements might be small and seem insignificant, yet an investor can capitalize over them for good returns in short-term, by utilising leverage.
An important element of the day trading strategy is speculation regarding the future price movements of the stocks. Before making a day trade, a sound investor would prefer to analyze the past prices and market movement patterns of the industry using charts.
Following are a few points that underpin any short-term investment:
- Make a decent beginning by investing in a few stocks rather than investing in many stocks and making it difficult to keep track of the market activities.
- Risk assessment in terms of money to be invested for day trading activities since there are equal chances of gaining as well as losing the money.
- Focus on making the decision based on logic and strategize the investment and avoid considering emotional decision making.
- Keeping an eye on the opportunity to make a trade and making the decision at the right time.
- Through study of the market economics and the stock performances knowledge by constant monitoring.
Technical analysis strategies
Technical analysis of the market data has been an imperative element of securities and futures market. In technical analysis, the price and volume data of the stocks provide indicators of future price movement, and this data forms the basis of the information on the fundamentals driving yields.
In contemporary times, an investor can choose from several indicators for technical analysis as a tool for short term investment. Technical analysis tools like the market trend, volume, range, support and resistance levels, chart patterns and indicators can help to anticipate the market behaviour. In addition to this, the use of different time-frame charts for making a multiple Time Frame Analysis gives a broader sense of the stockâs performance.
On the contrary, greater the number of tools, greater the complexity for the chart analysis. Moreover, the marketâs behaviour cannot be predicted by a set of analysis tools every time.
The bottom line of the technical analysis is the anticipation of the market movement (the future price of a stock) based on the information principally gained through the study of charts and trends. The Technical analysis strongly depends on the past statistical information gained from authentic sources about the price and volume of the securities. Moreover, technical analysis is based on the firm belief that the historical performance of the market can help to predict its future movement.
The indicators of the technical analysis lay the foundation for the complete investment strategy in accordance with the trading style of the investor and the risk-bearing capacity. For a short-term investment based on small moves with recurrent trivial gains, the investorâs strategy can be based on the volatility of the market.
WPL Daily Chart (Source: Thomson Reuters)
On the other hand, in a long-term investment strategy inducing big investment and long-term moves, the investor may consider moving average as the indicator for making the technical analysis.
The continuous and critical analysis using charts and other statistical information about the indicators helps the potential investors to keep a track on the performance of the complete strategy. The process of technical analysis and strategy formation induces at least one type of indicator for developing any forecast for the stocks. The indicators also act as a stand-alone tool for technical analysis without inducing them into the technical strategy.
Momentum investing strategies
Momentum investing strategies imply the idea of taking advantage of the market movements by investing in the upward moving stocks and earning profit and retrieving the investment when the stock prices are going downwards. For making easy short-term profits, an investor would generally prefer to buy the stocks that have been performing well over a year or more and selling the less profitable stocks.
Buying a stock at a high price and selling the same at a higher price is the bottom line of the momentum investing strategies. For a long period of time, the financial advisors, as well as investors, believed in the very old saying of buy low and sell high. However, momentum investing strategy can help a short-term investor to earn relatively higher profits by taking advantage of the positive market movements.
A close watch on the stocks and keeping a constant track of the stocks that are performing good is inevitable for the formation of a sound momentum investing strategy. In addition to this, knowledge through various indicators and statistical information representing the stockâs performance over a longer duration can help to develop better intellect about the investment plan.
Momentum investing carries a significant risk for the investor; however, it is compensated by the high returns that the investor gains from the investment. Moreover, a momentum investor is not primarily interested in making decisions based on the companyâs operational efficiency or financial performance. The investor considers the price momentum of the stocks by analyzing the trends through indicators and technical analysis.
To some extent, the decision regarding the momentum investing strategy is based on the technical analysis tools and techniques. Various technical analysis tools like trend lines moving averages etc. can be used to develop a good Momentum investing strategy. In a momentum investing, the investors attempt to obtain gains by either selling or buying the securities when they are reflecting high price momentum.
Bottomline
Short-term investment carries a significant number of benefits as well as risks for the investors. However, these risks can be mitigated by thorough analyses of the market movements and volatility. Moreover, short-term investment requires analyzing the technical performance of the stocks through charts and other statistical tools. In a nutshell, we can say that a short-term investment is attractive due to its liquidity and short-term transferability. If an investor wants to make a short-term investment, he/she can go through the above-mentioned strategies.
Disclaimer
This website is a service of Kalkine Media Pty. Ltd. A.C.N. 629 651 672. The website has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine Media does not in any way endorse or recommend individuals, products or services that may be discussed on this site. Our publications are NOT a solicitation or recommendation to buy, sell or hold. We are neither licensed nor qualified to provide investment advice.
