Both short term trading and long term trading can be effective trading strategies, however, long term trading has several significant advantages. There are several benefits to long term trading, which include compounding and its effect on pricing, the chance to earn from dividends, a mitigated impact of price fluctuations, more alacrity in making necessary corrections and less time required to keep track of stocks.

Compounding

Time is of the essence, and indeed that holds true for the investor, as it lets compounding time manifest itself. Compounding can be described as a mathematical concept wherein interest that is already charged on the principal would accrue interest on it, thus adding up to the total principal.

Dividends

You can also hold a stock and thus accrue dividend payouts – this is a second way in which you can boost the value of your investment. Because there are companies that would allow you to reinvest your dividends with more share purchases, you can easily add to the existing value of your investment with little to no hassle. Dividends are also quite indicative of a business’ game plan and its overall success, a much better barometer than the invariably ambivalent market trends that often lead to price fluctuations.

Reduction Of The Impact Of Price Fluctuations

Long term investment has investors less impacted by short-term, albeit volatile price fluctuations. The market tends to address all factors that keep changing in the short term. So a person involved in long term investment or trading will not be affected as much by short term instability due to factors such as liquidity, fancy of a particular sector or stock which may make the price of a stock over or undervalued. Good stocks that may have been affected by several short term factors would then be able to bounce back in the long term and produce sufficient returns.

Long-term investors, especially those whose investments are more diversified than others, would be able to ride out the proverbial storm and make the most out of a down market – any drop in their performance would usually be negligible.

Faster Correction Process

It is highly likely that you could achieve a constant return over a long period. The reality is that there will be times when your investments earn less and other times when you make a lot of money in short term. There may also be times when you lose money in short term but as you are in quality stocks and have long perspective of investment you will earn good returns over a period of time.

If stocks fail to achieve the desired results not just once, but several times, then it would be justified if you would pull out of that investment. With a long term perspective based on quality stocks, it is easier to make decisions to change in a more timely manner without the urgency that accompanies short term and day trading strategies chasing volatile changes.

Investors that are able to plan ahead and stay in the market would invariably be the ones who ride the storm out and make the most out of those upward trends in the market – all they have to do is adapt a long term perspective of things with long term trading strategies.

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Penny stocks get their name from their price range, each priced between 1 cent and $5 and they are traded through the Pink Sheets or the OTC Bulletin Board. These stocks are also traded through foreign and other securities exchange on a regular basis. When you begin to trade penny stocks there are certain rules that you will need to follow that are different from the rules the regulate trading stocks on the major exchanges.

The following rules have been set down by the SEC or the Securities and Exchange Commission and they pertain, specifically, to the trade of penny stocks.

The SEC needs the brokerage house to secure a written agreement with their client abut the transaction and their client must be in a position to complete this agreement.

The brokerage house must provide their customers with documentation outlining all the potential risks that are involved with penny stock trading.

Consumers must be informed about whether there is a market quotation on the stocks they want to purchase and what that quotation is.

The brokerage firm must also disclose to their customers what their commission will be for the trades.

The SEC requires that each brokerage house provides it’s customers with a monthly statement outlining the market value of each of their penny stocks.

The rules governing the trade of penny stocks were put in place to ensure that trades were fair and that investors knew about the risks before investing. These rules were set in place by the SEC to ensure that new investors knew what they were getting into and that they wouldn’t get in over their heads.

The control of monies paid to a broker for use for buying stocks in your name is in the brokers hands as outlined in Rule 15c3-3 or the Customer Protection Rule. Brokers will need to figure out on a regular basis how much of the money they are holding belongs to their customer or was gained via stocks owned by the customer. If the broker decides that there is more money on their books than what is owed to the customer or if the customer has over paid, the excess must be placed into a reserve bank account. The money in this account is for the sole benefit of the customers. This vital rule helps to stop brokerages from using their clients money to further their own business interests.

These rules are designed to protect all aspects of stock trading, the investors as well as the brokers and also the stock market. If a broker breaks any of the SEC’s rules that they will be the subject of SEC investigations and that can spell trouble for the brokerage house as well. learning these rules and making sure that your broker is following them means that you will know that your investments have not been compromised in any way.

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There’s a question that is generally asked by people who are new to financial markets and is debated by experienced ones. What is the difference between trading and investing? The two are very similar.

In my book, The Essentials of Trading, I point out that the only difference is definition. They are both very simple ways to gain capital. When buying a stock, one expects to either earn dividends, or increase in price. Trading has one main difference, being that one expects to exit. This might be in the form of price targeting or in terms of length of time the position will be held. The trade seems to always have a finite life. Investing leaves for open endings. An investor buys a company’s stock with no predefined notion of selling.

For the sake of demonstration, here is an example. Warren Buffet is an investor. He buys a company that is undervalued, and holds on to his positions until he stops liking their prospects. He doesn’t think in terms of a price to exit the stock. George Soros is a trader. He thought the British Pound was overvalued and ready to be withdrawn from the European Exchange Rate Mechanism. His position was based solely on circumstance. Soros exited with a good profit when the Pound was devalued in market. Because an exist strategy was in place, this would qualify as a trade.

Trading can also be defined as another way. It has to deal with how capital is expected to produce a return. The appreciation of capital is the objective in trading. You buy a stock at 10 and expect it to go to 15, expecting it to go through a capital gain. If dividends or interest are paid out along the way, that is fine, but likely only a minor contribution to the expected profits.

Investing, however, looks more toward income over time. The major focal point is income production. So, do investors experience capital appreciation? Unlike in trading, that is not the main motivation, but yes.

Consider what people think of as their biggest investment, being their home. A home doesn’t produce income, though, so is it really an investment? It definitely produces more expenses, with electricity, upkeep, and mortgage. A home is a trade. We buy it and hope it’s value will appreciate. People generally move in for a few years, then sell, which makes it more like a trade. If, of course, you own rental property, it is more of an investment. As mentioned earlier, trading and investing seem very similar. Selling and buying are pretty much the same when it comes to mechanics. Sometimes the analysis that a person does to make decisions is the same as well. Investing and trading are merely different because of definition.

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