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The Basics Of Short-Term Investing

Jul 3, 2008
Investing basics focuses on two broad sets of goals: short term and long term. The vast majority of investors have a plan for both and they have portfolios of stocks and bonds that they put together in order to best meet their short term and long term investment goals.

When it comes to short-term investing, one of your short-term investment goals may be to give yourself a "bonus" of $3,000 by the end of the year. For meeting that goal, one thing that you could do is invest money in companies that are known to be paying out dividends.

Dividends are paid out by companies to their qualifying stock holders. They are typically paid out in what is known as DPS, or Dividends Per Share. Typically, dividends are paid out quarterly, or four times per year. Not all companies who issue stock pay dividends. However, the vast majority of well-established and basically stable companies that are not in periods of rapid growth (meaning they need to use up most of their profits instead of pay them out) do pay dividends, and they are often a way of balancing out the volatility of their stocks' share price and thus attracting more potential investors.

Dividends are also paid out to the owners of mutual funds. If you own what is commonly called an "Income Fund" type of mutual fund, then it is your mutual fund manager's job to make sure he's investing your money in a whole basket of stocks and maybe other investment vehicles that can get you short-term income in dividends and, usually, also in what is known as capital gains.

Capital gains are increases in the value of a financial vehicle, including real estate, so that the financial vehicle is now worth more than the price you paid for it--in other words, it would be sold for a profit if you sold it today.

That's mainly how capital gains are earned in mutual funds: Once the share price of a given stock rises a certain amount above what it was paid for by the investors' money, the fund manager of the mutual fund sells off that stock, and investors who have put money into that fund are credited with capital gains profits in their fund account.

The constant buying and selling of stocks that are held (bought and then not re-sold) for only short periods of time (one year or less), often called "day trading", can lead to large capital gains--big profits--for an investor. However, it takes great financial insight to successfully "day trade" or manage something like a mutual fund, because doing it wrong can lead to the disaster of tremendous losses.

Thus, short-term investing, while a proper part of a balanced investment portfolio, is inherently riskier than its counterpart, long-term investing.
About the Author
David Brishen is a private investor who writes about investment fundamentals and strategies. Learn how you can make more out of your money at the author's website Top Investing Basics .
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