While many look at investing in the stock market as a way to build long-term wealth over the span of a few decades, others look at it as an opportunity to earn consistent income in the here and now. This is known as short-term stock investing.
But what are short-term stocks, and how do you go about investing for quick gains? We’ll cover the basics in this guide to set you up for success. From the pros and cons to tips on how to pick a stock, when to buy, and when to sell, you’ll feel confident taking the next step afterward.
Most importantly, though, we’ll introduce you to the best tools to streamline your trading strategy and eliminate emotion, human error, and guesswork from your decision-making. One of these is VectorVest, the #1 stock analysis software. Learn more below!
What are Short-Term Stocks?
So, what are short-term stocks? As the name suggests, these are stocks you have a bullish short-term outlook on – meaning you’ll invest in them for quick gains. The specific timeline is a bit fluid. It could be anywhere from a few days (or even a few hours) to a few weeks or months.
Whatever the case, the goal is the same: to capitalize on price fluctuations over this period, rather than holding onto the stock for years hoping for long-term growth.
This can be a useful approach for supplementing income from other sources like a full-time job to cover present-day expenses, or, you could be interested in swing trading for a living and making this your day-to-day work.
Speaking of day-to-day, your workflow will involve setting up stock screeners to bring opportunities to your fingertips on a daily basis. Then, you’ll use a combination of technical and fundamental analysis to confirm and execute upon these opportunities.
Because these investments are so much more volatile than long-term ones, you need a reliable system in place to make sure you enter and exit your positions with precision and timeliness. The margin for error is much smaller with this approach in contrast to long-term trading.
That is to say, investing in short-term stocks is better suited to an investor that has free time to focus on this strategy along with a higher risk tolerance. You need to be able to stay cool, calm, and collected under pressure. Let’s take a closer look at the pros and cons of this style below.
Are Short-Term Stocks Worth It? Pros and Cons to Consider
There’s no denying the appeal of short-term stock investing – you can earn consistent income without having to leave home! But, you need to be aware of the potential downside as well before you embark on this journey. So, what are short-term stocks pros and cons?
Pros of Investing in Short-Term Stocks
- Quick Profits: Investors can capitalize on rapid price movements triggered by news, earnings reports, or broader market shifts. Timing your trades to perfection can bring in significant profits in a very short period.
- Liquidity: Trading large companies or sectors with high liquidity makes it easy to enter and exit positions without the risk of not finding a buyer or seller at the right price.
- Flexibility: From day trading vs swing trading to scalping, there are a variety of strategies you can employ that align with a short-term investment strategy. You can even look into learning options trading!
Cons of Investing in Short-Term Stocks
- Higher Risk: With higher rewards come higher risks. These are more volatile stocks, and rapid swings can just as easily result in substantial losses as they could profits if trades don’t go as planned. You need to have a strong risk tolerance and a system in place to protect your portfolio from catastrophic losses.
- Higher Transaction Costs: The more often you trade the more transaction costs you’ll incur. These brokerage fees and short-term capital gains taxes can erode profits.
- Time and Attention: This style of trading requires constant monitoring and decision-making. Markets can move rapidly, and being inattentive even for a few minutes can result in missed opportunities or unexpected losses. Fortunately, you can rely on tools to do a lot of the heavy lifting for you, saving you both time and stress.
Is it Right For You?
Ultimately, only you can determine if short term stocks align with your personality and investment goals. If you can stomach a bit of risk, have a few hours a day to spare (less with the right trading toolkit), and want to earn more money, yes – this is a good strategy to try.
On the other hand, maybe you’re a bit more risk averse and are interested in long-term wealth generation with a more hands-off approach. In this case, buying and holding safe, established stocks, such as these safe dividend stocks, might be a better method.
You can learn more about the different stock investment strategies in our blog to weigh your options. But if you’re interested in seeing what goes into executing a short-term stock trading strategy, we’ll cover the basics below.
Tips on Getting Started Investing in Short-Term Stocks
Short-term investing can be stressful, but following a tried-and-true process for analyzing stocks and timing your trades will simplify things and leave you feeling confident. Here are some tips to point you in the right direction.
Understanding Technical Analysis
Technical analysis is going to be your bread and butter for finding worthy opportunities and executing on them. So, what is technical analysis of stocks?
- It involves analyzing price charts, trading volumes, and the best stock indicators to predict future stock price movements. There are a ton of indicators you have at your disposal, but these are the most powerful:
Moving Averages (MA): These smooth out price data so you can identify trends over different time periods (20-day, 50-day, or anything else for that matter). Crossovers between short-term and long-term averages often signal entry or exit points. - Relative Strength Index (RSI): This momentum oscillator shows whether a stock is overbought (above 70) or oversold (below 30). It’s used to time reversals in short-term trading, again, helping you find an entry or exit point.
- Bollinger Bands: These show volatility and price levels over time. Stocks trading near the top or bottom of the bands are considered overbought or oversold, again, serving as an indicator for entry or exit.
Because you’re trying to capitalize on short-term price fluctuations, most of your analysis will involve trend indicators like these. But, you can also use volume indicators to round out your research.
We have more tips on how to analyze stocks in our blog, including how to do technical analysis of stocks. But let’s look at the other half of stock analysis.
Does Fundamental Analysis Have a Place in Short-Term Trading?
Most of your focus should remain on technical analysis, but it’s worth understanding fundamental analysis to a certain extent as well. So, what is fundamental analysis of stocks?
This looks at the business itself rather than the stock. It gets into the fundamentals behind a company, assessing earnings reports, news events, or any catalysts that could cause short-term price movements.
It’s definitely more important for those building a stock portfolio with a long-term outlook. But, it has its place in any stock trading strategy for that matter.
For example, stocks that report better-than-expected earnings often see sharp increases in price, making them good candidates for short-term trading. On the flip side, if a company reports poor earnings, that could provide an opportunity to short the stock.
So even though you don’t necessarily care about a company’s long-term prospects, this method helps you anticipate short-term volatility. Learn how to do fundamental analysis of stocks in our blog.
Develop a Trading Plan: Day Trading, Swing Trading, Options Trading, and More
Short-term stock trading is an umbrella term with a variety of sub-strategies that fall under it. We mentioned swing trading, day trading, and scalping already, but options trading is a compelling approach as well. Here’s a quick breakdown of your options:
- Day Trading: Buying and selling stocks within the same trading day. It protects you from overnight price fluctuations, but requires far more time and effort than other methods.
- Swing Trading: Holding a position for several days or weeks to capture short-term price movements. It’s a more moderate approach compared to day trading since you have more time to make decisions based on market trends.
- Options Trading: Short-term traders often use strategies like buying call or put options to capitalize on quick market movements. Learn how to sell covered calls in our blog.
Whatever strategy you choose, you cannot overlook the importance of having a sound trading plan that you can fall back on. This eliminates human error and emotion from getting in the way of profits.
It entails having a target profit on every trade before you even buy the stock, and knowing where you’ll cut losses should the plan not play out how you’d envisioned.
Taking Profits and Cutting Losses
So, what sort of profit should you aim for? How much of a loss should you be comfortable taking? These are questions you need to ask yourself before you make your first trade.
Unfortunately, actually exiting a trade is one of the hardest things for new investors to get a grasp on because it involves so much emotion.
When a trade is going well, you don’t want to take profits too early and miss out on more. When it’s going poorly, you don’t want to cut losses because it’s tough to admit you were wrong about your outlook, and you’re hoping things will turn around after all.
This goes back to the need for a trading plan, one that removes you from the decision making process. When you hit your target profits, you close out your position – or at least capture some profits.
Similarly, you have a maximum loss you’re willing to take, and in the event your trade goes south, you accept the loss and move onto the next opportunity rather than watching your entire position erode.
Using take-profit orders and stop-losses can automate this for you so that you don’t get in your own way. The specific profit percentage you should aim for all depends on your strategy – but it’s been said that a risk/reward ratio of 1:3 is a good rule of thumb.
Tools to Streamline Your Short-Term Stock Trading Strategy
Now, what are short-term stocks investment tools you can use to make your life easier and set yourself up for higher returns? We’ll cover a few basic solutions along with some more sophisticated tools to help you make the most of any trading strategy.
Stock Screeners
How do you actually go about finding short-term stocks to trade? That’s where screeners, also referred to as scanners, come in.
These are a type of software that allow you to set specific parameters that align with your ideal requirements for a stock. Any stocks that meet those requirements are listed as options to trade.
Parameters range from price movements to volatility, market capitalization, and trading volume. The more advanced the screener, the more specific filters can be – like screening for stocks that show signs of a breakout or finding high-volume stocks near support/resistance levels.
For example you could use a stock screener to quickly identify stocks with high relative strength index (RSI) readings or moving average crossovers. These will save you countless hours of manually searching through stock charts. Learn about swing trading scanners in our blog.
Stock Research Websites
There are tons of great free stock analysis websites you can leverage as well, especially for fundamental analysis. But, there are many websites that review and analyze individual stocks for you as well.
More advanced platforms might provide deeper insights like market sentiment, insider buying/selling activity, and institutional ownership trends.
Better yet, these websites have tons of free resources to help you learn more about investing – like VectorVest. Our blog has tips on how to find undervalued stocks, how to find stocks to day trade, how to find stocks to swing trade, when to buy stocks for beginners, when to sell a stock for profit, and more.
That being said, free resources are just the tip of the iceberg at VectorVest…
VectorVest
We’ve mentioned a few times that most of the drawbacks to a short term trading strategy can be alleviated with the right tools – from the time and expertise needed to the stress of making decisions or finding your next opportunity.
The VectorVest stock advisory eliminates all these concerns by delivering clear, actionable insights to help you win more trades with less work. You’re given everything you need to make emotionless, calculated investment decisions in three simple ratings.
These are relative value (RV), relative safety (RS), and relative timing (RT). Each sits on a scale of 0.00-2.00 with 1.00 being the average, allowing for quick and easy interpretation. It gets even better though, as you’re given a buy, sell, or hold recommendation for any given stock at any given time.
It’s not just the best stock analysis app, though. It’s also the best stock picker app because it brings you the top opportunities that align with your strategy straight to your screen on a daily basis.
Whether you’re looking for the best dividend stocks or falling stocks to buy, aggressive stocks to buy now, the best stocks for Roth IRA, the best stocks for covered calls 2024, the best stocks to buy for beginners, or anything in between, there’s a list of picks waiting for you.
VectorVest has outperformed the S&P 500 index by 10x over the past 20 years, and it can help you simplify investing so that you spend less time in front of a screen while earning higher returns. See it in action yourself with a free stock analysis today!
ProfitLockerPro
Choosing when to take profits and when to cut losses on a stock can be tough, especially with how quickly conditions can shift in the stock market.
This is why it’s often best to remove yourself from the process of closing out your position altogether, leaving it to a tried-and-true system like ProfitLockerPro.
It uses dynamic stop-losses and take-profit orders so that you can squeeze as much profit as possible from every single trade while shielding you from losses. Pairing it with VectorVest gives you a dynamic duo to win more trades with less work and stress.
Bringing Our Beginner’s Guide on Short-Term Stocks to a Close
So, what are short-term stocks? We hope this beginner’s guide has left you with a clear understanding of what these opportunities are and whether or not they align with your goals.
Our blog has more resources on dividend vs growth stocks, best day of the week to buy stocks, the best blue chip dividend stocks, buying the dip, highest paying dividend stocks, and more.
At this point, though, the only thing left to do is hit the ground running now that you know all about short-term stock trading. Armed with these insights and the right tools, you’ll be well on your way to executing that first profitable trade in no time.
Whether you need the best stocks app for iPhone or the best stock app for Android, VectorVest is the #1 investment app for beginner and seasoned traders alike. Don’t just take our word for it, though. See it in action yourself today!
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