The stock market is one place where investors can put their money to work. It’s often the default option for newer investors. It‘s relatively easy to understand and investors can buy shares in companies they know. For example, an avid iPhone user in the late 2000s who recognised the explosive growth of the Apple device at the expense of BlackBerry would have been wise to buy the stock and hold it.
But some investors don't want to wait decades for an investment to pay off. Many investors, especially millennials, prefer quicker results from short-term investments.
If you’re interested in short-term trading and investing, this guide is for you.
What is short-term investing?
It may seem obvious that short-term investing means investing in stocks or other assets for the short-term, but it’s a bit more complex. There is no standard definition of what constitutes the short-term.
Professional stock traders might consider a short-term period to last minutes or hours. By contrast, billionaire investor Warren Buffett, best known for his buy-and-hold strategy, might argue that the short-term is 20 years. After all, he first bought American Express stock way back in 1964 and has held it long-term ever since.
The difference in definition comes down to how each group of investors manages their holdings and executes a strategy.
Traders typically look to take many small profits over a short period of time. They might buy a handful of stocks at the opening bell and close all positions long before lunch. Day traders buy and sell financial instruments within the same trading day, so that all positions are closed before the market closes.
While day-traders and Buffett represent two extremes, for the purpose of simplicity let's assume that a short-term investor is looking to perhaps invest money to start a family or buy a house in roughly 5-10 years.
Short-term investing strategies
What are some general short-term trading tips?
A manufacturer of a vital component for the 5G telecom infrastructure would potentially see strong growth as the platform is deployed across the world. According to professional services group PricewaterhouseCoopers, 5G applications will contribute $330bn to the global GDP by 2030. Investors could find stocks that directly benefit from such rapid expansion.
Let's move on to look at a company-specific example. Please note that past performance is never indicative of future gains, and that investing in any stock, regardless of the company's exposure to a catalyst, can result in losses.
The clean energy space is another example of short-term stock investing strategies as it involves investing in companies with exposure to a clear catalyst. We are seeing the emergence of new clean energy companies.
Blink Charging is one of the many examples of how investors can capitalise on existing themes as part of their short-term stock trading strategies. Case in point, this maker of electric charging stations said in its first quarter 2021 results that:
1) Revenue was up 72% year-on-year to $2.2m
2) The number of charging stations soared more than 370%
3) The company acquired 7,071 charging ports in Europe
Does all this mean that Blink stock is guaranteed to trade higher over the short-term? Not necessarily. Considering the stock has already gained more than 1,300% over the past year, some would argue that much of the stock’s future potential has already been realised.
While certainly a valid point, others would argue the company’s quarterly revenue of $2.2 million implies the company has large growth potential over the coming years. EV sales are modeled to rise from more than 10 million today to 145 million by the end of the decade. In other words, the market that Blink addresses will soar in size, and the company would be expected to significantly scale its operations.
What about long-term investments?
Long-term investments could result in investors sitting on their holdings for several years with little to no gains. They might have picked a potential winning stock but it isn't clear if it will take off in the coming years or in 2040, say.
Consider the stock of Plug Power, which develops hydrogen fuel cell systems that can replace conventional batteries which require electricity. In early 2021, Plug Power agreed to accept a $1.5bn strategic investment from South Korea’s SK Group.
Sounds promising, right? According to a press release that announced the deal, the South Korean government is modelling the cumulative economic value of its hydrogen economy to hit $40bn by 2040.
Does this make Plug Power an ideal short-term stock to invest in based on the company’s products and technologies? Assuming the global market for hydrogen power would only take off in 2040, the answer might be no. Considering that 2040 is still a long time away, much can happen over the next two decades, including growing competition or the creation of newer and better alternatives.
To conclude, short-term trading strategies that work hinge on taking advantage of well-communicated and understood catalysts that can last at least five more years.
Trading сurrencies for the short-term
Having explained what short-term trading is, let’s move on to see how investors can search for opportunities in other markets. The foreign exchange (FX) market never shuts, unlike the stock market, which operates during set hours.
The fact that the FX market operates throughout the day and night makes it potentially more lucrative for short-term traders. The FX market is much more liquid compared to stocks. so short-term strategies for traders looking to get in and out within seconds or minutes are, in theory, more plentiful compared to stocks.
Investors who define short-term in the years can also find plenty of opportunities in the FX market. In fact, short-term forex trading strategies in currencies are no different than investing in shares.
Think of a catalyst, or trading idea that will play out over a multi-year period. It could relate to central bank policies, a deteriorating economic or political situation, or any other event that would prompt investors to think that buying the currency can generate a return over the coming years.
As an example, Goldman Sachs economists modelled for UK GDP to grow by 7% in 2021 and 6.2% in 2022. Economist Sven Jari Stehn said the country’s outlook is “significantly above” consensus estimates owing to the successful Covid-19 vaccine rollout that’s among the most advanced in the world. He stated:
Because the last five or so years were dominated by Brexit and the Covid-19 pandemic, one would assume that two years of economic growth in 2021 and 2022 should sustain itself through at least the halfway point of the decade. This would imply that buying the British pound at current levels is a reasonable short-term investment strategy, although nothing can be guaranteed as markets can often go against you.
Trading cryptos for the short-term
Do the same theories of what constitutes short-term trading apply to cryptocurrencies? Logic suggests ‘yes’, even though short-term crypto trading is still a new concept. In fact, the entire crypto asset class is new – bitcoin (BTC) is just 12 years old.
Fewer professional stock and FX traders are as comfortable trading cryptos as they are with currencies and shares. This isn’t necessarily due to the volatile nature of cryptos, rather a result of the industry's young age. But investors should look for ongoing themes that will continue playing out over the coming years.
As digital assets continue to gain traction, we gain some idea of where the industry could be headed by 2025. Fund manager Ark Invest models bitcoin’s market cap to rise to as much as $1trn to $5trn by 2030.
By comparison, bitcoin traded with a market cap of roughly $680bn at the end of June 2020, according to CoinMarketCap.
Trade Bitcoin to US Dollar - BTC/USD CFD
Will bitcoin reach such heights? We don’t know. But buying bitcoin with the expectation of holding it through the end of the decade could be a viable short-term trading strategy, provided it is invested with money you can afford to lose. A much shorter time frame to speculate on BTC volatility is considered an attractive option by short-term traders, including CFD traders. Still, the extreme volatility seen in bitcoin and nearly every other coin could shake out inpatient investors and those who merely had the misfortune of buying on a wrong day.
Speculating on immediate price movements could prove to be beneficial, although bears risks. Consider trading various asset classes, including stocks, forex, cryptocurrencies, indices and commodities with contracts for difference, which are widely used by short-term traders around the world.
With CFDs you can benefit from leverage and increased flexibility. You can speculate on any market’s price movement, whether it goes up or down by opening a long or a short trade accordingly. Always conduct your own analysis before entering a trade.