Many stock investors will argue back and forth over what they consider to be the most effective trading strategies. You have some investors who will defend short term trading strategies, while some will contend that a long term strategy is best. Of course both strategies can be employed and both strategies have their strengths and weaknesses. In this piece we are going to take a look at why long term investors consider their strategy the best.
Long term investors contend that the major advantages of their strategy are:
1. Changes in stock prices are not as troubling.
2. They have an opportunity to earn dividends.
3. They can spend their time of other things versus monitoring stocks all day long.
4. More time for their investment to grow.
Stock Price Changes
Since long term investors are focused on the long run they are less affected by sudden changes in the stock price. Long term investors, for the most part, look for solid companies to invest in. They understand that the market price has a lot to do with the emotions of buyers and sellers of stock and economic climate, and less to do with a company’s actual performance. If anything, long term investors know that a sudden reduction in a price of a good stock presents them with an opportunity to buy more good stock at a lower price.
Dividend Income
There are a lot of investors who purchase stock simply because the stock pays dividends consistently every quarter. Holding on to a stock to benefit from dividend payouts is a good way to increase the value of your initial investment. Most corporations allow you to reinvest dividends to purchase more stock, hence increasing the value of your investment. Furthermore, investors who hold stock for longer periods of time will argue that dividends give you a more accurate view of a company’s performance versus the actual stock price. Why? In order to pay dividends a company will have to have cash in the bank. In addition to that, the company will have to be making a profit. Unfortunately, stock prices are largely based on the emotions of buyers and sellers and less on company performance.
More Time For Other Activities
Unless you can invest thousands of dollars in sophisticated software that automatically trades for you, then if you are a short-term trader you will need to be glued to your computer screen monitoring stock prices all day long. Investor who buy and hold stock for longer periods of time, invest in a company that they consider solid and check their investment periodically. They are not concerned with the overall changes in the market, but rather with performance of the company. As a result, longer term investors have more time to spend on other activities other than watching stock prices.
More Time For Your Investment To Grow
It is very likely that long term investors will achieve a nice return on their investment over the longer periods of time. Yes, there may be periods of times where the stock price of a particular stock will take a turn for the worse. However, if the company is a solid company consistently bringing in a profit, then over the long run the stock price will rise.
Lastly, investors who invest with the buy and hold perspective argue that if you start early investing in solid companies you will be able to endure the worst market conditions and take advantage of the times when the market is at its best.
