Stock market ai can be overwhelming, to say the least. Whether you’re a fresher who has just started working and is looking to build a corpus early or a seasoned trader with years of experience. Before entering the stock market though, it is extremely crucial to take a step back and figure out your financial goals and your risk tolerance. When it comes to doing this, you have two main choices – long term stocks investing and short term stocks investing. Both of them offer their own merits and pose their own risks. And we’ve put together a quick rundown of the two to help you make an informed choice. Read on.
Long term investing: Building wealth over time
Long term investing refers to holding investments for several years, typically five or more. The approach leverages compound interest, allowing your money to grow exponentially over time. Imagine you invest Rs. 10,000 in a mutual fund that provides you with a 10% return annually. Well, in the first year, you will earn Rs 1,000 on your investment, bringing your total corpus to Rs. 11,000. In the second year, you earn Rs 1,100 on the Rs 11,000, assuming the same 10% return. In this way, your earnings continue to grow each year, and your earnings for the previous year become your investment base for the next, which allows for accelerated growth over time.
How to choose stocks for long term investment in India? Bearing the same in mind, long term investing has several pros, and cons too.
Pros of long term investing
- Firstly, stock markets have historically delivered higher returns over the long-term through compound interest, as we saw earlier.
- Next, long term investment stocks aren’t subject to losses due to stock market fluctuations in the short-term, whether due to policy decisions, elections, natural disasters and wars, and so on. Due to this, they also typically require less active management.
- Long-term capital gains are taxed at lower rates as compared to short-term gains. For example, in India, in the Union Budget 2024, the tax rate for long-term capital gain was set at 12.5%, as compared to 20% for short-term gains. Broker fees and commissions are also far lesser, owing to the reduced frequency of trades.
Cons of long-term investments
- Your money is tied up for a longer period of time, making it less accessible in case of any unforeseen expenses.
- Inflationary trends can erode your purchasing power with long-term investments, despite having made a profit.
- By committing to long-term investments, you may often miss out on returns from short-term market fluctuations.
Short term investing: Quick wins and higher risk
Short term investing, in contrast to long-term investing, refers to buying and selling securities within a relatively short period with the expectation of making a profit. This period could be anywhere from a matter of minutes or hours until markets close for any given day, to a few weeks. The approach leverages market fluctuations and capitalizes on the same. Market fluctuations here, as mentioned earlier, could be caused due to policy decisions, or due to events such as wars, natural disasters, inflationary or deflationary concerns, and so on.
Short term investments, just as long term investments do, have their own pros and cons.
Pros of short-term investing
- Firstly, if you manage to accurately predict market movements due to any given reason, short-term investments can yield significant returns.
- Short-term investments can also be converted to cash easily, in contrast to long-term investments, wherein your money may be locked in for a longer period.
- Most importantly, short-term investments are a great way to learn about the market and understand just what factors may cause you to make a profit or a loss on future investments.
Bear in mind, that in the same way as long-term investments, short-term investments come with their own set of challenges as well.
Cons of short-term investing
- Short term investments are much more susceptible to market volatility, which exponentially increases the chances of making losses.
- Short term stocks require monitoring the market continuously to capitalise on market movements and make a profit, which means it is more time-consuming as well.
- Short-term capital gains, as mentioned earlier, are typically taxed at a higher rate than long-term gains. In India for example, any investments for a period of less than a year qualify as short-term investments, as compared to long-term investments which are those made for over a year. The former is taxed at 20%, as compared to 12.5% in the case of the latter.
- Frequent trading in short term investment also incurs higher fees and commissions, which eats into your profits.
Finding the right balance
Now that you know of the pros and cons of both short and long-term investments, how do you choose between the two? Well, the trick is to strike a balance between the two for maximum returns.
It is here, that seeking expert advice from a share market advisor or stock advisory services in India or abroad, can come in handy. And now, these needn’t even necessarily be physical entities. With the rise of AI-based stock trading India, platforms such as Jarvis Invest are leveraging the power of artificial intelligence to analyze the market and offer personalised investment advice, in real-time and on the go.
For long term stocks, Jarvis Invest can provide you with best ai stocks in India for intelligent investment solutions, based on (circling back to what we said in the beginning) your financial goals and your risk tolerance.
By carefully considering the factors mentioned above and seeking expert guidance, you can make informed investment decisions and increase your chances of achieving financial success. Remember however, historical performance of any given stock is not necessarily indicative of future results. All investments are subject to risk from market fluctuations.