Short term Trading V/s Long term Investment

Many times we face this dilemma, whether short term trading is profitable or investment i.e. holding equity for a longer duration is helpful. Although, both have single major motive of earning profit, what factor should we focus on while selecting one method is what we would like to share with you today. Also, these are not the external factors like interest rate change, technical/fundamental chart analysis of any particular equity or any management decision but all about your PERSONAL FINANCE.

Concept

As a concept, we can bifurcate day trading as short term decisions of buy –sell undertaken to benefit from prevailing volatility in the market. On other hand, Investment is holding a particular equity for more than at least a year’s time to benefit from the change in price. So, if we go by this textbook definition, it can be understood that only price fluctuations is a major criteria to follow any one of them.

Factors

In reality, we need to focus on few other factors that are not external but related to our personal finances. They have nothing to do with the movement with the economic market works.

a)    Plan for your Financial Goals – Identify your goals and start saving for them accordingly. Goals should be placed in two groups - necessary and not so necessary. You should involve your financial planner to help you prioritize your goal sheet. Also, identify which asset can you earmark/tag or use to meet your goals. This will help to maintain these goals over the period.

b)  Identify your assets – It is important that we identify our total assets and the end purpose of their accumulation. We need to discipline our investing attitude accordingly so that we don’t keep on fluctuating our asset tagging. It is no different from your piggy bank concept. This will help us whether we in reality have idle assets that can be used to trade without disturbing our goals.

c) Never take a liability to trade – It is a known practice that nobody likes to maintain high level of liquidity like huge balance in bank or cash. For any trading opportunity seen by us and if we has lack of liquidity at that point of time, we take a liability to earn the meagre profit. For example- We take a personal loan @ 17% pa to earn 20% pa in equity market for short term. In reality, it might seem we have earned 3% net profit, but to that we should never forget to consider the tax implications. (i.e. short term capital gains are taxed at 15%). Further, the loan gives rise to monthly commitments of money to be repaid, which might affect our cash flow.

d) Balance your risk and profit – With every gain there is an equal amount of risk, which needs to be balanced off well. It is never advised to gamble all your assets for even the most tempting and lucrative one time opportunity of your life. It is wise to remember that “chance is always second last”. So, no chance is so important to bet our life earnings on it.

e)  Involve your family – It is always seen that trading opportunities come with a very small time window to trade. So most of time, we make our decisions without informing anyone especially our family or financial planner. This could prove hazardous considering the underlying unknown risk variables.

f)   Keep your research ongoing- It is advised that even if you want to trade , you should only choose the investment, which has a sound fundamental backing with good past performance.

So, am I saying it is bad to trade for short term? No, however we have to make a conscious effort to see we balance well between risk and profit. If you are saving enough for your goals ; have made adequate arrangement for contingency funding and if still you are left with surplus funds, then it is wise to take calculated risk for short term trading. So first design your financial plan to secure your bread and then plan for chance trading to buy your extra toppings

Thanks and Regards

Team

Saarthi Financial Planner

Email: saarthifp@gmail.com

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