There is no doubt about the fact that investing in stocks is the best way to make money. Then why do people do not participate in stocks and keep their cash in banks? The question that puzzles people the most is How? How should an investor approach the market so that he consistently makes money? If you analyze the most successful people in the investment business, you will find that most of these investors made their fortune not by trading stocks, but by buying quality businesses and staying invested in it for long term. So is long term investment the best way to make money? Yes, being a long term investor for the past 10 years, I have not only made money, but have also enjoyed the process and the freedom it brings to my life. Â Â Â Â Â
So what are the advantages of long term investment? Let us discuss all of them one by one:
Itâ€™s less emotional, gives you a good nightâ€™s sleep:
Traders spend hours working on methods, strategies and formula to find which stock is going to rally in short term. Trading may work for many but in my opinion it is not the best way to make money from the stock market because of the following reasons.
First, trading is based on speculation, there is no method to predict with certainty, which stock will move up in Â the short term, which makes trading a riskier business compared to investing.
Second, It requires lot of time and effort to trade stocks, you have to keep tracking the market all the time and analyze its consequences on your trades. Lot of work!
When you invest in stocks for long term, you do not worry about daily ups and downs of the markets. For a long term investor, the goal is to find a quality business and stay invested in it for long term. This also helps you get you a good night sleep as you don’t have to worry about where your investment will be tomorrow.
Does not require huge capital to start:
Trading requires huge capital investment to begin for meaningful profit gains. This makes it a risky business as you may lose all your money very quickly. Long term investment, on the hand can be started with small amount. If you invest small sums of money for a long time, compounding growth works in your favour, turning small investment into a huge amount over a period of time.
It can be managed by a professional:
When you trade in stocks, you have to invest your time and effort in finding the right stock to trade, keep tracking the market movements and checking the target and stop losses. This requires you to invest lot of time and effort which may prove exhausting for you. When investing for long term, you can chose to invest yourself or can also invest indirectly via mutual funds which is managed by a professional and experienced fund manager, who watches markets closely in order to maximize return on invested capital while minimizing the risk. This takes the burden of tracking the market off your shoulders, allows you to focus on your job or business. Hassle free isnâ€™t it?
Power of compounding:
As Albert Einstein said â€śCompounding is the eighth wonder of the world.â€ť Compounding adds back your interest to your initial investment, helping it grow faster. When you invest in market for long term, you allow your money to grow at a compounding rate over a period of time, the only difference is, the rate of compounding is much higher than what you get in your fixed deposits. Successful investors like Warren Buffett strongly advocate investing for long term and practice the same principles in their investment strategy. In one of his speeches, Warren Buffett said â€ťTime is a great friend of a wonderful company, enemy of a mediocre oneâ€ť. If a company is performing well, and growing continuously, holding it for a long time will make you richer as power of compounding works in your favour.
Companies with good financial performance distribute a part of their net profit to their shareholders, which is known as dividend. Many investors invest in stocks for earning dividend income and have little concern with capital appreciation of the companyâ€™s share price.
Dividends can also be reinvested. Reinvesting dividends can boost your return on investment. Since dividends are tax free, it is seen as free money which can be used to buy more shares of the company, increasing your total investment without adding capital from your own funds.
Long term investment are very tax friendly. If you hold a stock for more than one year, all your capital gains will not be taxed as long term capital gains is tax free (if you have paid STT). In the short term, if you sell a stock before one year, you will have to pay 15% of total profit as short term capital gains are taxable.
Long term investments are cost effective:
Every Time you buy and sell a stock, there are some expenses you have to pay such as commission of your stock broker, STT (Security transaction tax) stamp duty etc. Frequent buying and selling takes big chunk of profits away from you in the form of these expenses. If you buy and hold for long term, you wonâ€™t have to pay these expenses again and again, helping you keep cost of investment low.
Many still debate about the investment approach, let me tell you, this is not the only way of making money, there are many traders who have made money trading stocks. The reason why I prefer this method is because it is the most simple, rational and successful way of investing I have ever experienced. Will, it work for you? Yes of course, you just have to follow the right strategy, maintain the discipline of investing, and be patient. Simple Â Â