How Hard Is It To Make Short Term Gains From Stock Market Investing?
A huge number of people enter share trading with the goal being to earn good long term profits. However once they get a feel for the markets, many of these investors will begin to contemplate making profits from short term trading as well.
Now there is definitely money to be made from this style of investing. I have done so myself on numerous occasions in the past. However the major drawback is that it is really quite hard if you attempt to do so by buying and selling shares in the normal way, ie through your stock broker.
At the end of the day your success will be determined by the size of your trading capital and the transaction costs that you have to pay for. To demonstrate this point, if you have an account with TradeKing, for instance, and you attempt to purchase a total of $500 in your chosen company with the hope of selling for a quick profit, you will have real difficulties.
When you take into account the fact that you are required to pay a dealing cost of $4.95 just to buy these shares and an additional fee of $4.95 when you sell the shares, that comes to just under $10. So when you are trading $500 at a time, you would need to make 2% on your investment just to get back to the original break-even point. That’s before you even get into a profitable position.
It’s a similar story if you use one of the other brokers such as Zecco, for example. Their fees are also $4.95 for every purchase or disposal at the current time, and you should bear in mind that these are arguably the cheapest brokers that you can trade with. Most of the other stock brokers charge more than this.
So if you are serious about making money consistently on a short term basis, you really need to be trading pretty large amounts. This will ensure that the transaction fees are relatively small in terms of percentages, and will make your profit targets a lot more achievable.
Another reason why some people can’t make money from short term trading is because the share prices of the big large cap stocks are often heavily influenced by the direction of the wider stock market indices. For example a typical FTSE 100 stock will often move approximately in line with the main FTSE 100 share index, and the same thing can be observed when you look at most of the shares in the Dow Jones index as well.
The result of this is that it becomes very difficult to predict where a particular stock is headed in the immediate future, because it hardly ever moves independently of the wider market. You therefore need to attempt to predict where the main index is heading as well.
So the point is that short term stock trading is very difficult in general (although not impossible). I would generally recommend to people that they buy stocks for the long term because undervalued stocks will often go up to their true and realistic market value at some point in the next few months or years, and you can make much greater gains because of the longer time frame.
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