What Are the Disadvantages of Short-Term Investing?

While you can make money quickly with a short-term investment strategy, it can entail significantly higher risks. In addition to greater potential risk, there are other disadvantages to short-term investing.

Short-term capital gains are taxed differently than long-term capital gains. Short-term earnings are taxed at your regular federal income tax rate. If, for example, you are in the 28 percent tax bracket, your short-term profits will be taxed at 28 percent. The rates for long-term capital gains are lower.

Holding onto your investments for only a short while can also incur other expenses. For example, you may be charged higher brokerage commission fees. In addition, if you are a speculator, you will have to pay many more transaction costs for all that active trading, thus reducing your returns. Inflation can also be a concern, especially with securities such as short-term bonds.

Another disadvantage to short-term investing is that it's not always possible to earn profits in a short period. Many investments may fall in the short term but grow steadily over the long term with increasing returns.

Even if you're lucky enough to make gains on your short-term investment strategy, remember that you will have to subtract taxes and transaction costs to determine your true profits.