Jun 19, 2022
Short-term investments have been widely misunderstood for years. The truth is, you can make a lot of money with short-term investment strategies. But there are a lot of misconceptions about them — many of which lead people to dismiss or avoid this approach.
What’s the truth? What exactly is short-term investing? Are there any risks? And what makes it such an effective strategy? Let’s find out.
Short-term investing is buying financial instruments with a term to maturity of two years or less. This includes stocks, bonds, mutual funds, CDs, and other investment instruments.
The term maturity can range from one day to as long as you want it. You can buy as much or as little of this kind of product as you want. This flexibility is what makes it such an effective way to make money. It’s flexible enough that you can buy the right amount with just a few minutes of your time each week (or month).
There are two main types of short-term investments: stocks and bonds. There are also many kinds of mutual funds, including:
Stocks: These are the most popular kinds of short-term investments. They’re called “stocks” because they represent ownership in a company that owns and operates a business. Most stocks are traded on public exchanges, meaning investors can buy them from all over the world.
The price increases and decreases constantly to reflect the value of the company doing business over time – not who you might think. If you purchase a share of stock, you are owning a piece of that company. The more shares you buy, and the longer you hold them, the more your share will be worth.
Stocks can be bought and sold in 30-second increments on the NASDAQ at any time during the day. Because there is no limit to how many stocks can be bought or sold in a day, they've been called "trade quads."
Bonds: These are considered high-yield investments because they pay higher interest rates than U.S. Treasury bonds do. They're called "bonds" because they are used to finance long-term loans. Bonds range in value from $1,000 to $10,000, but the terms on which they can be paid back can differ from 10 years to the next day.
Bonds are like a loan from your local bank for which you are required to pay interest continuously over a fixed amount of time. They pay interest set at the time of issue and is guaranteed by the U.S. government or other organization listed on the bond itself.
There are also other types of short-term investments: CDs, money market accounts, and mutual funds.
There are actually none. There's no risk that you'll lose your money. And there is zero risk of losing money by investing for a short period of time.
Let's go to the car example:
Our car is "risky" in that it's a one-way ticket to Kalamazoo or some other place. You might not like the way it handles, and you won't be able to sell it when you need cash. But if you're confident in its safety, that's an acceptable level of risk for an investment with a relatively low time horizon.
Similarly, the market is a one-way ticket to Wall Street. There's no way to go anywhere else with it. If you want a return on your investment, you're going to have to sell it somewhere else. That's why people sometimes say that "the market is the biggest casino in the world."
There are people who don't like this kind of risk and think that you shouldn't invest this way at all – especially because they think the stock market isn't really a place where the real value is created. Instead, they think that it's just a place where paper wealth can be created by buying and selling stocks or bonds that make no sense at all.
For some, this kind of risk is not acceptable. For others, it's a worthwhile gamble. Only you can decide how much risk is ideal for you.
No one ever loses money by investing on a short-term basis – not even with leverage. You can leverage as much or as little as you want to amplify your returns. The catch is that returns are limited to how much the investments themselves appreciate in value within the given period of time.
Making money with short-term investment strategies starts by identifying trends in the market and then positioning yourself accordingly with investments that reflect those trends. After all, if you're investing in 30 stocks, you're going to have a better shot at capitalizing on upswings than if you have only one or two investments.
But how do you know when to buy and sell? You can get good at this by watching the rise and fall of the markets. You'll quickly get a feel for when to enter the market, and how long you should hold on to stocks that you own. This is what financial professionals call "market timing." It takes a lot of experience, but with time you'll develop an intuitive sense of when to buy or sell.
You don't want to be in it all the time but you do want some exposure at all times. Since you don't know exactly what's going on in the market all the time, it's best just to be present in an equal amount of purchases – regardless of whether they're small or large.
Another way to make money with short-term investments is to use some sort of automated investment plan. There are young plans that exist for people in their 20s, but nothing as mature as what a traditional 401k has to offer. That’s because these plans really aren't designed for total beginners and can easily get out of hand.
The best kind of plan is one that tracks the market and doesn't have any real-life consequences when you invest in it. This way, you can start getting invested without breaking your budget or straining your resources. Use these plans with the market timing suggestions above and you're sure to make money. Be sure to do your research so that you know exactly what you're investing in.