- The idea of short-term investments
- Choosing stocks for short-term investments by tech analysis
- Choosing stocks for short-term investments by fundamental analysis
- Bottom line
There are several ways of investing in the stock market:
- You hold stocks for a long time, making a profit on dividends and the growth of the stock price. This is called long-term investing.
- You buy stocks and hold them for a short-term investing at making a profit on a future event in the company, such as the publication of quarterly reports. This is short-term investing.
- You speculate stocks during a trading session. This is called intraday trading.
I have already explained to you how to find stocks for long-term investments, so today I will speak about short-term investing and how to pick up stocks for this.
The idea of short-term investments
Short-term investments mean waiting for a certain event that is expected in the nearest future. Depending on your idea, you may be holding the stock for any time between a day and several months.
The time of holding an open trade in short-term investments is conditional; in this article, under short-term investments, I will mean holding your position for longer than one trading session and up to several months.
I will say it again that there is no exact border between short- and long-term investing. It depends on how long it will take for the event to happen. Quite often, a short-term investment turns into a long-term one as the investor does not dare to sell the stock upon reaching the goal.
The process of choosing a stock for short-term investing consists of two parts:
In fact, it is a rare case that a stock is bought based just on one type of analysis. Sometimes the decision is influenced by technical analysis, sometimes by the fundamental one; anyway, if both types of analysis tell you the same, such a choice is perfect.
Choosing stocks for short-term investments by tech analysis
Let us discuss choosing stocks based on tech analysis.
To make the right choice, you must be at least a beginner in tech analysis. The things you need to know are:
- The basic graphic patterns
- How to find and use support/resistance levels
- The basic technical indicators and how to work with them
The easiest way of choosing is by searching for graphic patterns. For this, you will need Finviz.com.
In the stock scanner, choose tech analysis and mark the patterns you are interested in. In our case, we will look for a Triangle chart pattern.
The website uses special software to find the patterns, and the software does not always search correctly, so assess the offered variants yourself, checking at least three pages.
From the stocks below, choose those featuring the most attractive Triangle: the price hardly escapes the borders, and the overall pattern looks like a triangle and not some other thing.
A Triangle on the stock of Acco Brands Corporation
Let us have a look at the stock of Acco Brands Corporation (NYSE: ACCO). On the chart, we see a sharp horizontal line; a breakaway of this will signal to buy the stock; there is also the lower line pushing the price to the upper border.
Thus we get a ready-made trading strategy, featuring:
- An entry point (the breakaway of the resistance level)
- The level for taking the profit (the width of the Triangle)
- The escape point (the return of the price into the Triangle) in case the price goes in an unplanned direction.
Now we just wait for the entry point to appear. Meanwhile, we can assess the situation: check the news about the company and calculate how many days you will need to hold the position open for this short-term investment.
To do this, check the history for how many days the price needed to cover such a distance earlier. We find out that the stock needed a minimum of 10 and a maximum of 27 days to pass 3.5 USD. Calculating the average, we figure out that we will need to hold the stock for about 18 days.
Choosing by other parameters of tech analysis is the same. Anyway, you will have an idea that the stock may work off.
Now have a look at the work-off of a similar chart pattern earlier.
The price formed a Triangle, the stock was caught by Finviz.com, where you could find it. Then the resistance line was broken at 27.70 USD, and the price reached its goal after 14 days.
Choosing stocks for short-term investments by fundamental analysis
Logically speaking, fundamental analysis looks more trustworthy as we analyze the financial state of the company which should influence the stock price. However, the real state of affairs in the company quite often differs significantly from what is going on with the stocks.
For example, Tesla (NASDAQ: TSLA) remained losing for four years in a row but its stocks kept growing in price. That is why relying fully on fundamental analysis may be unwise; however, certain information may be useful for short-term investments.
A short-term investments with dividends
Look at an example of a short-term investment with dividends. Things seem clear: you buy a stock, hold it for a long time, and get dividends paid to you. In reality, knowing the date when the dividends will be paid, you may earn more than the dividends themselves.
How to make a profit on dividend information?
To make a profit, you need to know who gets dividends paid and on what conditions. The size and date of dividend payments are decided at the shareholders' meeting. They also decide whom to pay the dividends. In other words, they set the date on which the stockholder must hold the stock in their portfolio.
This day is called Ex-date. The R Trader platform features a built-in stock scanner which shows the Ex-dates. Knowing the date, traders can buy the stock a day before the payment and right on the next day at the market opening receive the dividends and sell the security.
Here, we also have a hidden opportunity to make a profit not only on dividend payments but also on the growth of the stock price. The thing is that the Ex-dates are available to everybody, and few investors would like to hold the stock for years if they can receive the dividends at once. As a result, several days before the Ex-date, the demand for the stock increase, and so does its price.
This is the moment you may make a profit on, and sometimes the profit will be several times bigger than the dividends.
Look at the example of the Broadcom Inc. (NASDAQ: AVGO) stocks.
The Ex-date was June 19th, which means that you were to buy the stock on June 18th. The dividend payment amounted to 3.25 USD per stock. If you bought 100 stocks, your dividends would have amounted to 325 USD. However, four days before the Ex-date, the stock price grew from 290 to 315 USD, i.e. you could earn 2,500 USD from 100 stocks. This is quite a popular scheme for making money among traders.
Of course, the devil is in the detail: for you to make a profit this way, the company has to be financially strong, and the size of the dividend must be attractive. If the company pays just 2-3 cents per stock, no one will be interested in it, hence, there will be no growth of the price. You can play on some future events, both negative and positive, the same way.
Short-term investments and the Apple Inc. Keynote
On June 22nd, the company presented its new product. A week before the event, the demand for its stocks increased, and the stock price grew from 332 to 350 USD.
Last year, September 10th, Apple presented their new iPhone 11 Pro, iPhone 11, Apple Watch Series 5, and iPad. 5 days before the keynote, the stock price grew from 205 to 214 USD.
These events make it clear that there is a group of investors who practice making short-term investments, calculating on upcoming events, and thus make a good profit.
When trading fundamental events, the buying price is set during the trading session, in other words, it is bound to no level. You define only the day when you but the stock. With taking the profit, things are the same.
The day before the event, sell the stock before we never know how the event will affect its price. Of course, you may risk and wait for the news – if the market interprets it as positive, your profit will increase. However, sometimes it happens that the stock price drops even after positive news because the latter is already accounted for by the stock price.
All in all, if you hold the stock for too long, your risks increase.
Unlike long-term trading, when the trader may count on the ratings of the largest agencies that analyze the financial results of companies, short-term investments require your own knowledge and wit.
Of course, short-term investments have its advantages. You may decide upon the idea you will be working off and stick to its rules. Sometime later you will become an expert in your field, you will see and understand stock movements thanks to your experience.
The R Trader platform features over 12,000 instruments, so you can find those that suit you every new day and never focus on just one stock.
Invest in American stocks with RoboForex on favorable terms! Real shares can be traded on the R Trader platform from $ 0.0045 per share, with a minimum trading fee of $ 0.25. You can also try your trading skills in the R Trader platform on a demo account, just register on RoboForex.com and open a trading account.