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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 the best short term stocks in 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 of short-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 –
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
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.