Many value investors prefer to buy-and-hold selected stocks by not considering short term price movements and technical indicators.
Buy-and-hold is considered as a long term passive investment strategy where value investors keep a relatively stable portfolio over time regardless of short term price movements of stocks.
In this article, we will be discussing the benefits of holding stocks for the long term.
Benefits of holding stocks for the long term
Holding stocks for a long term means the investor is holding it for more than a year. Long term approach requires discipline, patience and hard work.
Investing for the long term offers countless benefits in comparison to those traders who try to time the market (day traders).
Compounding returns
By looking at several asset classes returns over several years, you will find stocks have outperformed all other asset classes such as bonds, ETFs and fixed deposits.
Compounding returns refer to the process where the return on your investments generate their own returns.
When as a new investor, you start with initial investment in stock, you earn returns as the stock appreciates in value. Over the years, both your initial investment and return on it will appreciate if the price of the stock goes up.
If any dividend is earned on your investment, that can also be reinvested back to the company to earn more out of the return. This means, if you receive dividends and reinvest them, those dividends themselves will start to generate returns.
Reduce impact of short term price volatility
Based on change in market sentiment, news and other factors, stock prices can fluctuate for a short period of time.
By holding stocks for a longer period of time, an investor is less affected by these short term price fluctuations.
Over a long term period, the impact of short-term price volatility is smoothed out, allowing the compounding effect to dominate.
Benefit of Long term capital gain tax
Profit from sale of investments in stocks end up in a capital gain.
Depending on the period of holding, capital gain can be short term or long term. Based on short term or long term categorization, the capital gain will be taxed in India.
In India, capital gain tax on stocks depends on the holding period. If you sell the stock within one year of buying, it will be termed as short term capital gain. At present short term capital gain is taxed at the rate of 15% plus cess and surcharge.
Short term capital gain tax rate has been increased to 20% in budget 2024.
Long term capital gain tax on stock will arise when the holding period is more than a year. In India, long term capital gain tax is charged to tax at the rate of 10% plus cess and surcharge without the benefit of indexation. Investors can get 1,00,000 rupees as exemption benefit in case of long term capital gain. This means, any amount exceeding 1,00,000 will be taxed at the rate of 10%.
Budget 2024 has increased the long term capital gain tax rate to 12.5%.
For example, you bought stock worth 2,00,000 rupees and sold it after a year at 2,20,000 rupees. Your long term capital gain in this case is 20,000 rupees. Since this gain is under the 1,00,000 exemption limit, no tax would be payable.
By holding stocks for a long term you pay less taxes in comparison to short term trades where holding period is less than a year.
Cost effective
Frequent buying and selling will cost more as you have to pay more.
Securities Transaction Tax (STT) is levied on the purchase and sale of stocks listed on a recognized stock exchange in India. Securities Transaction Tax (STT) is applicable at different rates for various transactions and is deducted at the time of the transaction.
For equity intraday, securities transaction tax (STT) is 0.025% on the sale side. This means, when you sell a stock in intraday trading, you will be charged 25 rupees per one lakh.
In case of delivery, securities transaction tax is charged at the rate of 0.1% on both buy and sell side. This means you pay 100 rupees per one lakh for both buying and selling.
Even though the percentage of securities transaction tax (STT) is higher in delivery, frequency of buying and selling in intraday trading strategy will add up the securities transaction tax to cost you more.
In addition to Securities Transaction Tax (STT), buying and selling of stock also attract following costs;
- NSE / BSE charges
- SEBI charges
- Brokerage
Transaction charges at the rate of 0.00322% by NSE and 0.00375% by BSE are charged on your buying and selling of stocks. The more you go long or short a stock, the more you pay.
Similarly SEBI charges 10 rupees per one crore as their fee.
Brokerage is charged as a percentage on the total of buying and selling transactions. However, discount brokers can reduce brokerage charges as they will charge you a flat fee instead of a percentage on total buying and selling.
These expenses are charged based on the buying and selling in the stock market. In day trading, traders buy and sell stocks the same day. Cost will be more in day trading in comparison to investing.
In addition to the above cost, we also have other charges such as DP charges, annual maintenance charges, pledging charges, call & trade and others. We have only considered those costs which will impact most on your profitability if you choose intraday over long term trading.
Dividend
If you are holding stocks of a blue chip company or a company which declares a dividend regularly, then you may get a dividend regularly.
Dividends are distributed by companies out of the company’s profit.
Reinvesting dividends back to the stock can enhance your overall return.
Intraday trading will not give you a dividend. Even in short term trading, the basic objective is not to get a dividend but to take advantage of price volatility.
Emotional stability
Long-term investing strategies can help investors to reduce stress and anxiety related to market fluctuations, as they are less focused on daily price movements and more on the long-term growth prospects of investments. Long term investing reduces the stress associated with trying to time the market.
Long term holding requires you to focus on the underlying value of the stock rather than short term price movements.
Valuable advice on long term investing
We have renowned investors known for their successful investment strategies and influence in the finance world.
Here are few valuable advices on long term investing from Warren Buffett, Peter Lynch, Ray Dalio and Benjamin Graham.
World renowned investor Warren Buffett, CEO of Berkshire Hathaway, suggests investing in industries and companies you understand.
Buffett stresses that patience is key; great investments often take time to realize their full potential.
Warren Buffett often recommends reinvesting profits to take advantage of compounding growth.
Buffett advocates for purchasing quality companies and holding onto them for the long term, allowing time for growth and compounding returns.
Warren Buffett suggests focusing on fundamentals. He suggests investing in businesses with strong fundamentals, including a durable competitive advantage, strong management, and consistent earnings.
Peter Lynch, who manages Magellan Fund at Fidelity offers several key pieces of advice for long-term investing. Here are few of them:
- Focus on industries and companies you understand.
- Research companies thoroughly before investing. Look at their fundamentals, management, and growth potential.
- Seek stocks that have strong growth prospects but are not excessively valued.
- Long-term investing requires patience.
- Hold a diversified portfolio to reduce risk
- Avoid herd mentality.
- Investing is a marathon, not a sprint.
- Be prepared to sell if a company’s fundamentals deteriorate or if its stock becomes overvalued.
Ray Dalio, founder of Bridgewater Associates offers valuable insights on long-term investing. Here are some of his key principles:
- Understand macroeconomic factors and know how they influence markets and investments.
- Diversify portfolios across various asset classes to manage risk and enhance returns.
- Adjust strategies based on changing economic conditions and market dynamics.
- Understand the risk associated with investments relative to their potential returns.
- Analyze mistakes and learn from them to improve future decision-making.
Benjamin Graham, who is considered as the father of value investing, has offered several timeless principles for long-term investing. Here are some of them:
- Focus on the intrinsic value of a company rather than its market price.
- Buy stocks at a price significantly below their intrinsic value, it gives a margin of safety to protect against errors in judgment or market volatility.
- Spread investments across various assets to reduce risk.
- Analyze financial statements, earnings, and management quality.
- Maintain emotional discipline and avoid making investment decisions based on fear or greed. Stick to your investment strategy.
- Know the businesses you invest in.
Benjamin Graham’s teachings influenced many successful investors, including Warren Buffett.
