One of the most important decisions investors need to make, aside from where to invest their money, is how long to invest for. While some investors prefer long-term investments that can undergo losses and price increases over time, others prefer to make quick profits with short-term investments. Building a profitable short-term investment relies on careful planning and good risk tolerance.
The goal of building a short-term investment is to make a quick, usually small, profit by buying an investment product and selling it for a higher price in the near future. This means you'll need to identify investment products, such as stocks, bonds or commodities that you expect to increase in value soon. You can check historical prices and perform other research about the investment product you're considering to decide whether it's a good target for short-term investing. In general, highly volatile investments, which change value quickly and spontaneously, are bad short-term investments. A better short-term investment is a product with a steadily rising value.
Planning to Sell
Since you will only hold a short-term investment for a short period of time, you should have a plan for selling it even before you buy it. If you choose to invest in stock, decide which broker or online brokerage service you plan to use to make your sale as well as your purchase. For other investments you may need to appear in person or submit a written order to sell. Prepare these documents and learn about the sale procedure. Choose which account you want your money deposited into when you sell your investment, and start thinking about the next short-term investment you want to make once the money is returned to you.
There is no set definition of what constitutes a short- or long-term investment. Different tax policies apply to investments held for less than one year and those held for more than a year, but some short-term investments are bought and sold just hours or minutes apart. Before making a short-term investment, know your time line. Decide whether this is an investment that you hope to profit from (and pay taxes on that profit) this year, or next year. Share these plans with your financial planner or tax preparer before moving forward with the investment.
Before moving forward with a short-term investment, it's essential to consider the risks involved. Every investment carries some risk of losing value. If you invest money today and will need to sell the investment soon, you will lose money if the value falls between now and the time you sell. The amount of time that an investor can afford to be without money that's tied up in investments is known as the time horizon. If you'll need your money back soon, which might be the case if you plan on using it to fund your retirement, for example, you may want to select an investment with less risk. If you can wait longer for an investment to rebound, you can probably tolerate more risk.
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