Long Term Investment vs Short Term Investment

Learn the differences between long-term investors and short-term investors by reading this article. Long-term investors are those who invest their money in long-term financial assets and keep those securities for more than a year. While Short-term investors are investors who purchase financial instruments with the intention of holding them in their investment portfolio for a period of time that is much shorter than one calendar year.

Both short-term and long-term investments are completely different and as a result, each comes with its own unique set of expectations. When a person buys something with the intention of keeping it for a number of years, they do so with the expectation that the purchase will improve in value over time.

When an investment, such as a stock, has increased in value, the owner would often liquidate their holdings on the open market so that they may capitalize on the increase in value. On the other hand, when someone plans to make an investment in order to generate a return in the near term, that person or business may want to think about short-term investment vehicles, such as a certificate of deposit (CD), bridge loan, capital note, or any of a number of other possible options.

Pros and Cons of Long-Term Investment and Short-Term Investment

The followings are the advantages and disadvantages of long-term and short-term investments that you’ll need to take note of before investing. 

Long Term Investment

Pros

1. Investments made over the course of several years have a lower risk profile than those made over shorter time frames.

2. The second key benefit is a lower tax bill when you eventually cash out. The government will take a smaller chunk of your earnings from long-term capital gains (taxed at 0% to 20%) than it would from short-term gains.

Cons

Investing over the long term typically results in a lower return on investment due to the decreased level of risk involved. Your returns may have been diminished by inflation throughout the amount of time that you kept it, and the likelihood of making a significant profit is significantly lower than it would be with an investment that is timed to the market.

Short Term Investment

Pros

Short-term investments are risky yet beneficial in budgets. A well-executed short-term approach can yield significant gains fast. Reinvested funds can enhance your investment. 

Cons

Short-term investments have the disadvantage of higher tax rates even if they are successful. The gains from a short-term investment are taxed at the same rate as salary, whereas the profits from a long-term investment are subject to a different rate.