The main goal when investing in the stock market is to make money by selling stock for more than you paid for it. Two main strategies are employed by most investors: short-term trading or long-term buy and hold. Each strategy involves a different approach to price fluctuations in the market. You may also be taxed differently on the capital gains you realize when you sell the stock.
Overview of Short-Term Trading
Watching the stock market for opportunities to buy low and sell high is known as trading. Most traders are looking for a quick way to take advantage of short-term fluctuations in the market. If a stock is held for less than a year before being sold, it’s categorized as a short-term trade. This type of trading comes with the potential for easy profit, but it also comes with risk. A low-priced stock may not rise in value over the short term, or it may actually lose value.
Basics of Long-Term Trading
Buying stock and holding on to it for more than a year is categorized as long-term investing. The strategy in this case is to wait for the stock’s value to rise over an extended period of time, which requires patience and the ability to overlook short-term fluctuations in value. The ongoing performance of the stock is more important than recent ups and downs in value, especially for stock that is held for several years.
Exploring Tax Differences
The distinction between short- and long-term stock is critical when it comes to taxation. Under 2019 tax laws, capital gains from long-term stocks are taxed using a sliding scale based on your overall income tax rate. The three brackets that have been designated tax long-term capital gains at a rate of 0%, 15% or 20% based on your specific income level.
In contrast, short-term capital gains from stock that you bought and sold within a year are taxed as regular income, which is higher in all cases than the long-term tax rate. Tax law favors long-term investments since they contribute to overall economic stability.
Looking at Investment Considerations
Short- and long-term stock serves different financial purposes. If you’re investing for a long-term goal like retirement, then long-term stock makes sense. For short-term goals like buying a car or making a down payment on a house, short-term stock trading is more appropriate, provided you accept the inherent risk. Many younger investors have a mix of long-term and short-term stock since they have more time to recover from the effects of market volatility.
Catie Watson spent three decades in the corporate world before becoming a freelance writer. She has an English degree from UC Berkeley and specializes in topics related to personal finance, careers and business.