A long-term investment is where the stock is held for more than one year. However, investment, in this case, includes holding assets like bonds, exchange-traded funds, mutual funds, stocks, and others. However, there is a certain risk associated with long term stock holding while the returns are also better than short term investments. This can be better explained in the following manner:
Managing the highs and lows
Stocks are said to be kept for long-term investments. This is because the prices of stocks tend to fluctuate by 10% to 20% or more in the short term period. However, if the stock is held for more than one year then the highs and lows of the returns can be properly managed to generate higher long term returns. For example, the Yes Bank share price has fluctuated to a large extent in the last six months. However, the returns for the last 5 years were poor but in the long run it can be managed to get an average returns.
Lower capital gains after tax
In case you sell any investments, the profits from the shares come under capital gains. In case of any short term investments, the sales proceeds of the investments, in this case, shares gets taxed under ordinary income. Depending on the adjusted gross income of the individual, the tax rate can be as high as 37%.
However, if the shares are sold after these are held for more than one year, it is taxed under Long term capital gains. The tax rate in this case is 20%. Moreover, investors can also have the long-term capital gains as 0%.
Keeping stocks in the portfolio for longer periods can save costs rather than buying and selling stocks for short-term purposes. Moreover, you can also get tax benefits along with savings money in purchasing and selling stocks. Moreover, you also need to pay transaction fees every time you buy or sell any shares. Thus, it increases the overall costs for holding stocks in the short term purposes.
Dividends are corporate profits that are given to investors as a form of profits. Investors always want higher dividends. There are many companies that provide regular dividends. In this context, it has to be mentioned that defensive stocks are those which provide dividends no matter how the economy performs. However, if you hold a stock or mutual funds for short-term purposes, you won’t get higher dividends. But, if you hold the stocks for long-term purposes, then you have the opportunity to compound your dividends over time. There are also many companies that do not pay regular dividends as they tend to hold it as their retained earnings. Thus, there is a high chance that you might not get any dividends if you hold a stock for short-term purposes.
Higher long-term returns
There are various factors associated with the returns that are received from stocks at any time. These include age, the threshold for risks, the capital invested, and the investment goals of the individual. In this case, it is proven that stocks held for longer periods provide higher returns than stocks held for short-term periods in the majority of the cases.
This is because the risk associated with the stocks is less. However, it has to be kept in mind that sometimes trading in stocks can also provide higher profits, especially if a trader is opting for options like arbitrage. However, the risk associated with trading or arbitrage is very high and very few investors have the expertise to manage the risks and get higher returns. Thus, it is better for investors to hold long term stocks which provide higher returns in the long term.
Types of stocks to hold for maximizing returns in the long run
There are few stocks that are best suited for long-term purposes. Some of these stocks are as:
Investors should choose index funds. These are ETS which track the specific indexes and trades the way stocks are traded. However, these funds come at a lower cost and there is no need to pick and choose specific companies for investing.
Investors can also choose dividend-paying stocks. These kinds of stocks will add value to the portfolio, more especially in cases where the dividends are reinvested for long-term purposes.
High growth stocks
An investor can also invest in high-growth stocks. High-growth stocks are issued by companies that have the ability to generate higher revenues. Moreover, these stocks also provide higher dividends to the investors. However, it is also necessary to keep in mind that higher growth comes with higher risks. It is the responsibility of the investors to balance the returns with the risks. For example, the Yes Bank share Price indicates that it cannot be taken as a High growth stock because in the last five years, the prices have not shown good results.
There are other stocks where the investor can invest their money for long-term purposes. However, the investors will need to have some basic information about the stock market before investing money. In case, the investor is new to the market, they can take help from stock brokers who have in-depth knowledge about the stock market.
Other than this, it is advisable to the investors to invest in more than one stock for long term purpose. This balances the risk and helps in getting higher returns for the longer period. In case, the returns from one stock gets low, the returns from other stocks will balance the same.