Short-term stocks are those that you intend to hold for one year or less – sometimes a lot less. The expectation with short-term stocks is that you’ll see the stock’s price rise quickly and then sell it for a nice profit.
Long-term investments require patience and a willingness to ride out price fluctuations over years with the expectation that, in the end, the gain will be worth the wait. In the meantime, some long-term stocks pay dividends. Most short-term stocks do not because the companies that issue them are usually reinvesting their profits for growth.
Growth vs. Value Stocks
Stocks often are labeled growth or value. These are not formal classifications but rather marketplace perceptions. Short-term stocks can be either growth or value stocks.
A growth stock is one that’s expected to increase in value significantly enough that you'll make a nice profit when you sell it. Investors in these stocks tend to focus on young companies with a lot of potential for growth. But well-established companies that are doing well and are poised for more growth can be good growth stock investments too. Growth stocks are not always cheap because they’re highly valued in the open market.
Value stocks are those that are considered to be undervalued in the open market. Their prices tend to be low compared to competitors. The main risk with a value stock is that it remains a value stock for a long time because the market's perception of the issuing company has to improve for the stock price to rise. Investors in value stocks are betting that there is unrealized potential and it’s worth the risk.
What makes a growth or value stock an attractive short-term investment is its potential to go up in value quickly. Investors looking for good, short-term stock buys typically focus on new companies with excellent growth potential in burgeoning industries. Eye-catching stocks often are low priced and the companies issuing them have a product or service that has a rapidly growing demand. Information technology niches, biotechnology and home health care come to mind.
But the best short-term stock buys are not always offered by young companies poised for their big break, and they’re not always cheap. Established companies poised for a growth spurt could be good short-term investments. One recently published list of short-term stock recommendations included General Motors Co. and PepsiCo Inc.
All three investment strategies — growth, value and short-term — are betting that a stock’s value will increase substantially. Short-term investors are betting that increase will come quickly.
Finding Short-Term Stocks
Short-term investing can be very appealing. Get in, get out and make a profit. But every company that’s growing quickly or is positioned for a growth spurt is not necessarily a good short-term buy. There is no set formula for identifying the best short-term stocks, and a stock that’s listed as a good short-term investment today might not be tomorrow. Literally. So, a little homework can really pay off.
If a company appears positioned to grow quickly because it’s competitive in a market that’s already seeing rapid growth, consider whether there's room for more growth. If a company is offering something unique in a large target market, check to see if it's already shown strong sales growth relative to its size.
Research top management before you buy. You might not be able to pick the next Steve Jobs, but doing a little digging on the company’s executives can tell you how much experience they have that’s relevant to their current company’s products or services, and whether companies they’ve worked for in the past are successful.
Know the Pros and Cons
Stocks with rapidly increasing values are almost always high beta index stocks. Beta measures volatility and risk compared to a broad market index such as the S&P 500. A high beta rating means that the stock is extraordinarily sensitive to changes in the market, meaning it's a risky investment. But a stock with high price volatility also could be a good short-term investment opportunity if you time your trades right and sell before the price goes down.
What’s Your Strategy?
It’s no secret that everyone who buys stocks does it to make money. But in addition to knowing what your objective is, you need to know your threshold for risk. Develop an investment strategy, write it down and use it to guide your trading. All investors must decide for themselves what their strategy will be.
A good place to start is to quantify your goals and risk tolerance. An investment strategy without specific goals can lead to messy and expensive investment decisions. If short-term stocks are part of your strategy, quantify what you are able to spend on them and keep their risk factor in mind.
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