Short Term Stocks - Types, Advantages & Disadvantages of Investing (2024)

What are Short-Term Stocks?

Short-term stocks include financial instruments which are traded on a frequent basis. In other words, these financial instruments are not held by investors for a prolonged period, which is usually the case with long-term stocks.

In India, financial instruments which are held for a period of fewer than 12 months or 1 year are considered as short-term stocks. In effect, the profits made from trading these instruments are classified as short-term capital gains.

Investors who deal with short-term stocks are usually called day traders, swing traders, etc. Multiple forms of financial instruments can be considered for short-term trading, which includes both market-linked financial instruments and debt instruments.

Types of Short-Term Stocks

The different types of short-term investment options are mentioned and discussed below –

  • Treasury bills

Treasury bills are sovereign financial instruments, i.e. issued by the Central Government. These bills are traded in the bill market, which is a subtype of the money market.

This type of financial instrument is backed by the Central Government; hence, it is one of thebest short term stocksin terms of security. It is independent of market fluctuations and promises no loss to investors.

The value at which investors purchase treasury bills is determined through auctions. Income, in this instance, is the difference between the market value of this instrument at the time of maturity and its purchase price as determined during auctions.

There are primarily three types of Treasury Bills, each varying based on their maturity period –

  • 91-day treasury bill.
  • 182-day treasury bill.
  • 364-day treasury bill.

Regardless of its secure nature, treasury bills yield moderate returns.

  • Commercial papers

Commercial papers are issued by high-rated companies to raise capital to meet short-term financial requirements. These are not completely independent of market fluctuations; hence, this type of financial instrument carries a certain scale of risk.

Commercial papers, in most cases, come with a fixed lock-in period or maturity period. Such maturity period ranges from 1 day to 270 days.

However, as this type of financial instrument is not entirely independent of market fluctuations, it also carries a prospect of yielding a higher rate of returns compared to treasury bills.

These papers are traded primarily in the secondary market, also referred to as the stock market.

  • Certificate of Deposits

A certificate of deposit is a document issued against a substantial deposit. It is issued by banks and other financial organisations.

It was first introduced in India in 1989 by the Reserve Bank of India (RBI). Certificate of deposits are one of the most popular and preferred short-term investment avenues for individuals as it features considerably low risk and promises returns higher than treasury bills.

In addition to this, CDs or certificate of deposits are also liquid in nature. This type of short-term investment option features deposit tenure ranging from 7 days – 1 year. These are primarily issued to investors in the form of DEMAT or Usance Promissory Notes.

During issuance, investors can negotiate the CD rates. It is quintessential for investors to duly examine the market for the highest certificate of deposits rate offered by different financial institutions.

Individuals, as well as business organisations, corporations, trusts, etc. can opt to invest in this type ofshort-term stocks.

  • Equity shares

This type of financial instrument carries the maximum amount of risk in short-term trading. It is primarily issued by three types of companies –

  • Large-cap.
  • Mid-cap.
  • Small-cap.

Among these, equity shares issued by mid-cap and small-cap companies possess a high potential for significant yields; however, they also carry higher dependency on market fluctuations.

These financial instruments are largely issued through the primary and secondary market.

Who should Consider Investing in Short-Term Investment Stocks?

The decision to invest in short-term stocks rests with respective investors depending on their risk appetite and investment objectives.

In case investors prefer to maintain a steady flow of income without indulging in the risk to lose out on investments, they should consider investing in non-market linked or fixed income financial instruments. As these securities carry the promise of payback with a certain amount of interest after the lapse of the slated maturity period, it allows individuals to park their excess funds and enjoy capital appreciation on it without bearing any loss.

In case investors prefer to exponentially appreciate their surplus capital while taking the risk of capital loss, they should consider investing in equity shares. However, to secure short-term capital gains instead of loss, individuals must be well adept with the dynamics of the stock market.

Ideally, individuals should spread their investments across different short-term investment options to strike a balance between the risk and yield components.

Advantages of Investing in Short-Term Stocks

  • Liquidity

With the help of these financial instruments, individuals can earn yields or profits from their surplus capital while also maintaining their ability to meet any financial requirements in the near future.

  • Fixed source of income

Barring equity shares, other types of short-term investment options feature a fixed and secure source of income.

  • High income

Short-term investments in equity shares ensure considerably high yield or gains.

  • Low risk

All short-term fixed-income financial instruments feature a low to a negligible scale of risk.

Disadvantages of Investing in Short-Term Stocks

  • Low income

With the exception of equity shares, all other investment options provide low income.

  • High risk

When trading in equity shares, such investors run the risk to lose their investments owing to market volatility.

Hence, investors should duly consider their objectives and invest in short-term schemes accordingly. Individuals who are new to investing in securities should consider fixed-income securities to attenuate the level of risk. Conversely, individuals with significant experience can invest in equity shares to ensure a larger scale of income from their surplus income.

Short Term Stocks - Types, Advantages & Disadvantages of Investing (2024)

FAQs

Short Term Stocks - Types, Advantages & Disadvantages of Investing? ›

On the other hand, short-term investments offer greater liquidity and potential for quick returns, but they come with higher risks and require active management. Remember, investment decisions should align with your personal circ*mstances and financial objectives.

What are short-term stocks? ›

Short-term stocks include financial instruments which are traded on a frequent basis. In other words, these financial instruments are not held by investors for a prolonged period, which is usually the case with long-term stocks.

What are the advantages of short-term trading? ›

Short-term trading, otherwise known as active trading, has several advantages. You have the opportunity to make massive gains in small timeframes, and you often have more control over your finances and less risk since you can enter and exit the market within a single day.

What are the advantages of short-term securities? ›

The advantages of short-term debt securities include high liquidity and low interest risk due to their short maturity. However, the benefits tend to be lower compared to long-term debt securities due to lower risk.

Which stock is best for short-term investment? ›

Short Term Stocks to Buy or Sell May Recommendations
CompanyReco. PriceTarget Price
R RELIANCE INDUSTRIES LTD Buy OPEN29553030 | 3070
H HDFC LIFE INS CO LTD Buy OPEN586.15600 | 620
F FIRSTSOURCE SOLU. LTD. Buy OPEN219.4230 | 240
F FEDERAL BANK LTD Buy OPEN161.65175 | 183
4 more rows

What are the disadvantages of short term investments? ›

1. Limited Growth: Compared to long-term investments, short-term options may not provide the same level of significant wealth accumulation through compound growth. 2. Greater Effort Required: Constant monitoring, research, and active management may be needed to identify lucrative short-term investment opportunities.

What are short stocks examples? ›

For example, let's say a stock is trading at $50 a share. You borrow 100 shares and sell them for $5,000. The price subsequently declines to $25 a share, at which point you purchase 100 shares to replace those you borrowed, netting $2,500.

What are the disadvantages of short term? ›

Disadvantages of Short-Term Financing

The main disadvantage of this financing type is that it's very high-risk. Therefore, online lenders have no choice but to mitigate the risk in every way they can. The main solution they use is to set high interest rates.

What are the disadvantages of short term strategy? ›

Short-term goals have some disadvantages, such as potential limited impact and a focus on immediate gratification. Achieving short-term goals may not always contribute significantly to long-term success, leading to a lack of direction or a sense of stagnation.

What are the advantages and disadvantages of short term sources of finance? ›

Key takeaways:
  • Short term loans offer quick access to cash and may be available to those with poor credit history.
  • Interest rates on a short term loan are typically higher than on long-term loan and could lead to higher total interest paid.
  • Relying on short term loans as revolving credit could lead to a debt spiral.
Aug 16, 2023

What are the advantages of short selling stocks? ›

While short selling is sometimes portrayed as a negative force in markets, it can strengthen markets and benefit investors in several key ways. 1 Specifically, short selling facilitates efficient price discovery, improves liquidity, and promotes healthy skepticism among investors.

What are the main advantages of short term strategy? ›

Besides that, setting short-term goals has several various other benefits, including: It provides motivation and a sense of achievement as you reach each goal more quickly. It makes the process of achieving long-term goals more manageable and less overwhelming. It offers opportunities to learn and improve your skills.

Is short term investment good or bad? ›

Short-term investments: Safe but lower yield

(But if you can invest for the long term, here's how to buy stocks.) Short-term investments do have a couple of advantages, however. They're often highly liquid, so you can get your money whenever you need it.

Are short term stocks good? ›

Short-term stock trading, such as day trading or swing trading, can yield high returns. However, it's inherently risky due to the uncertainty of the market and the rapidity of price changes.

What is the best time to buy stocks for short term? ›

With all these factors taken into consideration, the best time of day to trade is 9:30 to 10:30 am. The stock market opens for trading at 9:15 AM and in the first 15 minutes, the market is still responding to the previous day's news with experienced traders waiting to make their move.

Are short term stocks risky? ›

Short-term trading can be very lucrative but it can also be risky. A short-term trade can last for as little as a few minutes to as long as several days. To succeed in this strategy as a trader, you must understand the risks and rewards of each trade.

Is it good to invest short term? ›

Short-term investments minimize risk, but at the cost of potentially higher returns available in the best long-term investments.

How to turn 10K into 20K fast? ›

How to Turn 10K into 20K Fast?
  1. Flip stuff.
  2. Start a blog.
  3. Invest in real estate with EquityMultiple.
  4. Start an online business.
  5. Write an email newsletter.
  6. Help others learn with online courses and webinars.
Apr 8, 2024

How does a short stock work? ›

Short selling a stock is when a trader borrows shares from a broker and immediately sells them with the expectation that the share price will fall shortly after. If it does, the trader can buy the shares back at the lower price, return them to the broker, and keep the difference, minus any loan interest, as profit.

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