Introduction

The stock market is often misunderstood to be a very scary place. Most novice investors associate it as a high-risk investment avenue. While risks are a part of investing in the stock market, not all investments require you to be on your toes. There is a way to sleep peacefully at night while staying invested in the stock market. The mantra for this is staying invested long-term. Read ahead to understand what holding stocks for the long term means and how it can benefit you.

Holding stocks for the long term: How it works

Holding stocks for the long term is a strategy where you buy shares of companies with a strong track record and retain them for several years. If you hold a stock for more than five years, you become a long-term investor. The idea of doing so is to benefit from the natural growth trajectory of the business. It allows your investments to appreciate over time and helps your stocks ride over short-term market fluctuations.

Staying invested long-term involves buying stocks of reputed and well-performing companies, observing the growth of the said company, reinvesting dividends, and riding temporary volatilities. In essence, on an emotional level, it is all about patience, discipline, and confidence in the power of time.

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Benefits of holding stocks for long term

The stock market is not just about buying low and selling high. It is about being disciplined, strategic, and patient to be one with the market. Holding stocks for the long term meets these criteria. Here are some of its other benefits:

·       Power of compounding

The most significant advantage of holding stocks for a long period is the power of compounding. When you dedicatedly stay invested and reinvest dividends, over time, you start earning returns on your previous returns. This creates a snowball effect where even your modest annual returns can lead to substantial wealth over decades.

·       Reduced impact of market volatility

Markets are inherently volatile. Price swings that happen are natural due to economic changes, interest rates, global events, and investor sentiment. All these issues are short-lived and even out over time. It is believed that the probability of losses in the stock market decreases the longer you stay invested.

·       Low transaction costs

When you frequently buy or sell stocks to gain from the fluctuating market, you end up paying high brokerage charges, commissions, and taxes. Holding stocks for the long term solves this issue as well. It reduces your number of transactions as you buy and sell one stock over a longer duration.

·       Aligned with business growth

The stock of a company brings with it ownership. So, when you invest for the long term, you align yourself with the company's growth. As the business expands, your earnings grow, as well as, the stock price. Such organic growth is one of the key benefits of holding stocks for the long term. Hence, it pays to stay in it for the long term instead of speculating short-term price moves.

·       No market timing anxiety

When you want quick returns, you must stay alert. Buying low and selling high requires you to time the market to recognise when it's in your favour. While this sounds great in theory, it is incredibly difficult in practice. Even seasonal investors get it wrong from time to time. You can avoid this risky game altogether with long-term investing.

·       Better financial planning

At every life stage, your expenses, goals, and investment capacity change. For example, you might not have the same goal as you plan your family compared to when you were in your early 20s. So, you need an investment plan that adapts to such shifts in life stages. An investment with a long-term horizon does this. With this approach, you can plan your asset allocation and risk exposure more effectively.

·       Simplified investment strategy

You can simplify your investment approach with long-term investment. Instead of constantly analysing market trends and adjusting your portfolio, you can focus on selecting quality stocks with strong fundamentals and hold them over time. This strategy eliminates any complexities you may face with otherwise aggressive investing.

·       Enhanced emotional discipline

Short-term investments require constant monitoring of market movements and quick decision-making. Such an environment can lead to jolting emotional reactions, such as panic selling during market dips. Contrarily, holding stocks for long terms brings in discipline and promotes rational decision-making devoid of market noise.

Conclusion

Now that you know the multitude of benefits that long-term stock holding offers, you can think of inculcating this approach for your investment. It's good to go with both short-term and long-term investing for varied goals. However, long-term investing lets you stay passively invested while your investments grow. You position yourself for sustained financial success with this approach. It is apt for you whether you are a novice or a seasoned investor.

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