In the world of stock investing, investors employ different strategies for making their investment decisions. Some investors rely on mathematical formulas as market predictors, while others rely entirely on investor sentiment to guide their decisions. As a short-term investment strategy, day trading is not for the faint of heart because of its inherent risks, which is one reason that conservative investors have learned the value of holding stocks for the long haul. Whether you’re a novice or a seasoned trader, the advantages of holding stock may appeal to your sense of caution – and it may pay off in the long run.
Removing Emotion From Investment Decisions
One of the benefits of holding stock is that it allows your investment to ride out the inevitable dips and spikes of market conditions as it gains momentum over time. Your nerves may rattle a bit when one of your stocks responds to a temporary speed bump in the market that drives its price down a few percentage points, but if you’ve held the stock for a fair amount of time, you’ve learned that this, too, will likely pass.
If you let the emotion of fear drive your impulse to sell when you see the price falling, you may fall victim to the opposite of the “buy low, sell high” mantra as you end up “selling low and buying back high.” The latter move, of course, can kill your returns.
Profiting From Long-Term Returns
Another advantage of holding stock is the historical track record of larger returns, when compared to other types of investments such as bonds and savings accounts. According to CNN, investing in stocks has yielded a 10 percent average rate of return since 1926.
Compared to 10-year government treasury bonds (with a current rate of 2.69 percent) and online savings accounts (with a current rate of 2.2 percent), the 10-year value of $100 invested in stocks yields twice the return ($260 return on stock, $131 return on bonds and $125 return on savings accounts). Although these amounts are impacted by inflation each year, the bottom line still tilts in favor of holding stocks.
Paying Less in Taxes
The profit you make on your stock investment is taxed as a capital gain. One of the benefits of holding an investment for over a year is paying a lower tax rate. If you’ve held the asset for less than a year, which represents a short-term capital gain, you’re taxed at a higher capital gains tax rate than if you’ve held the asset for a year or more, which represents a long-term capital gain.
The long-term capital gains tax rate is capped at 20 percent, but the short-term capital gains tax rate is equal to your regular income tax rate, which can reach a hefty 37 percent, depending on your tax bracket.
Performing Your Due Diligence
The U.S. Securities and Exchange Commission (SEC) recommends researching potential corporations before you invest in their stock. Public companies are required by law to register with the SEC and, generally, they also have to file quarterly and annual reports, which include independently audited financial statements.
The SEC's Electronic Data Gathering, Analysis and Retrieval (EDGAR) database is a good starting point for your research. You can access this free online tool by visiting SEC.gov/EDGAR. You'll be able to research a company's financial statements and operations information by entering the company name or ticker symbol.
Video of the Day
- Investopedia: 4 Benefits of Holding Stocks for the Long Term
- The Motley Fool: 9 Advantages of Long-Term Investing
- CNN Money: Ultimate Guide to Retirement
- NerdWallet: What Is the Average Stock Market Return?
- NerdWallet: 2018-2019 Capital Gains Tax Rates - and How to Avoid a Large Bill
- Investor.gov: Stocks
- U.S. Securities and Exchange Commission: EDGAR