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Friday, June 13, 2008

Safaricom Shares: To go Short or Long Term? The Right Way Revealed

By Mohamed Shabir (Emerging Africa Capital)

To say either one of them is the best solution is definitely being biased. This is because every individual is unique. The decision on which way to go really depends on an individual’s investment personality and risk profile.

There are risks in both long term and short term trading. The latter exposing an investor to greater risk. Generally, volatility and risk diminish over time. The longer you hold on to your investment, the higher the probability of you earning a profit.

With short term trading, you have to speculate which shares are going to be most volatile. In this case you see profits immediately but if you speculate on the wrong stock, you might end up losing part of your investment capital. If the company you are vested in is fundamentally strong with a strong upside potential, you will lose out on big potential gains if you were to cash out too early.

When thinking about long term investment you can take advantage of dividends payout. Many stocks can pay out dividends to their shareholders month after month. This could produce a monthly income for you.

With long term investing, although there is a higher probability of earning a profit, you would need to be particularly patience. Many times, it takes over a year to earn a significant gain.

You do not have to do much with a long term investment. Long term investors are proactive while short term traders are reactive. A long term investment plan requires much less time to set up, manage and evaluate than any other form of investing.

With short term investments you would see more instant returns. In this case, however, you require quick action on information as this is one variable that changes a stock’s price in the short term. If you read into information fast enough, profits would usually not be far behind.

One of the advantages of short term investing is the compound effect. If you need your investment to grow, reinvest what you make in the short term and reap even greater returns in the long term (if you maintain your good speculative run).

Most importantly, when considering short term investing, you need to realize that you will be paying more commissions and hence to make actual gains, your sell and buy prices must reflect profits even on deduction of commissions.

Both short term and long term trading depend on how you trade. The things to consider in deciding which way to go include;

1. What system fits with your personality, are you a risk taker or are you risk averse.
2. What is your level of knowledge on the market?

These questions, once answered will reveal ‘the right way’ for you. Invest, long term or short term. It’s your call.

(Mohamed Shabir is a Financial Adviser with Emerging Africa Capital)

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