Invest for a long term or short term?

Imagine the thrill when the stock you just invested in, zooms! What an easy way to make money! Are not good returns over a short period very tempting? Your next move: Identify other stocks that have this potential. From now on, all your energy will be directed towards making that quick buck, daily.

You will find yourself taking tips from every trader, reading every available material on the subject, spending hours studying charts and sighing at every small fall in the indices. Yet, with all the time and energy spent on it, you may end up burning your fingers. This is a reality that every newbie has faced, I am sure.Not only newbies- I have seen most of the investors trying the same. If you have decided to invest money in stock markets, it’s always better to remain invested for a long term. Here’s why:

BENEFITS OF LONG TERM INVESTING

Short term investments may have the potential to give you quick bucks, but long term investment has several significant advantages.

Advantage #1:Compounding: Time can be investor’s best friend because it gives compounding time to work its magic. Compounding is the mathematical process where interest on your money in turn earns interest and is added to your principal.

Advantage #2: Dividends: Holding a stock to take advantage of payouts from dividends is another way to increase the value of an investment. Some companies offer the ability to reinvest dividends with additional share purchases thereby increasing the overall value of your investment. Consistent dividend payout is a reflection of a company’s overall business strategy and success.

Advantage #3: Reduction Of The Impact Of Price Fluctuations: When you invest for a long term, your investments are less affected by short term volatility. The market tends to address all factors that keep changing in the short term. So a person involved in long term investment 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. In the long term, good stocks which may have been affected due to some other factors (in the short term) will give better than average returns.
Long-term investors can ride out down markets without dramatically affecting his or her ability to reach their goals.

Advantage #4:Making Corrections: 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.
There are always times when some stocks do not perform and it is the wise choice to pull out of an 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.

Advantage #5: Less Time Spent Monitoring Stocks: day trading requires constant monitoring of stocks throughout the day to capitalize on intraday volatility. But, Long term trading can be carried out effectively using a weekly monitoring system. This approach is most often far less stressful than watching prices constantly on a daily basis. Moreover, long term investment strategy helps you to concentrate more on your job/profession.

Advantage #6: Tax Effect: In India, short term capital gains (The profit you make by buying shares and selling it off anytime within a year) is taxable at 15% and there are no exemptions to it. Long term capital gains (The profit you make by buying shares and selling it off after a year) are totally tax free

Advantage #7:Oppurtunity to average down: Suppose you invest in a blue chip like reliance at Rs.1000 and for some reason the stock falls unexpectedly to Rs 850. That gives you an opportunity to buy more shares and bring the average cost down. This can bring dramatic increase in profits in the long term.

Advantage #8: Opportunity to make huge returns: Long term investments, if done after careful study of fundamentals, would give opportunity to create huge wealth over a period of time.Investors like Warren Buffet has followed this strategy to create wealth.

Overall, investors that begin early and stay in the market have a much better chance of riding out the bad times and capitalizing on the periods when the market is rising. When you invest for a short term, you miss out all these advantages.

You may like these posts:

  1. Should you invest or trade in stocks?
  2. Should you Borrow Money to Invest?
  3. How much money should you invest in stock markets?

3 Responses to “Invest for a long term or short term?”

Kaiden

September 20, 2011 at 6:17 pm

Life is short, and this article saved vlabulae time on this Earth.

udai shankar morla

July 18, 2012 at 4:57 pm

sir,
The article is very fine and benificial .
Thank you, sir,
Udai shankar .Morla

J Victor

July 19, 2012 at 7:50 pm

thanks udai.

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