Long-term trading or investing has always been regarded as the most straightforward fundamental approach towards creating wealth. Whether it is about institutional investors or investing legends like Warren Buffet, all followed this strategy for decades.
Long-term investors typically focus on well-defined investing strategies based on diversification through different asset classes, inflation, and risk-adjusted returns. They may prefer stocks of fundamentally strong companies or growth mutual funds. Future vs option is the subject for short-term traders.
- As a long-term investor, you should not touch your holdings and obsess over market trends. It is a classic approach that requires patience to witness significant returns in your accounts. It may be challenging for a few only; otherwise, most investors can have the patience to meet their long-term investing goals.
You need a demat account mandatorily to invest in the stock market.
What is a demat account: A demat account is an online repository that holds a variety of your financial investments in the stock market electronically. Open demat account charges vary by brokers. You can prefer a discount broker to open a demat account for free.
Let us discuss the primary benefits and drawbacks of long-term trading.
Benefits of Long-term Trading
-
Inflation-adjusted returns
Historically proved, long-term investment in the equity market can provide higher returns than the inflation rate. It helps you to build wealth over the years.
-
Compounding comes into the role
Compound returns are one of the primary benefits of long-term investing. Most investors prefer long-term investments to accumulate a corpus for kids’ education, wedding, retirement, or world tour. Compounding gives a multiplier effect to returns, thus helping in wealth creation to meet such financial goals.
-
Periodic Returns
Long-term investing is not only known for capital growth over time through price appreciation, but it allows you to earn periodic dividends also. You can invest in fundamentally strong stocks that continuously pay dividends to their shareholders.
-
Deal with risks and volatility
Direct equity investments and equity mutual funds are known for their volatility in the short term. You can manage such volatility and involved risks through diversified long-term investment. Diversification helps to reduce volatility and boost returns on a risk-adjusted basis.
-
Save Taxes
Long-term trading helps you in saving taxes. Short-term traders attract capital gains tax on their applicable income tax slab rates. On the contrary, long-term capital gains attract only 10% taxes. Capital gains are the profits made on the sale of long-term equity investments. If you hold listed stocks for more than one year from the date of purchase, it is a long-term investment.
-
Hassle-free
You can invest online. There is no need to learn different complex trading strategies. You need not use sophisticated trading platforms like an active trader and can stay focused on your work when your funds work for you. You need not disrupt your work routine every day to know each detail of the stock market. All these facts make long-term investing easy and hassle for every individual.
Drawbacks of Long term Trading
As every trading style has some drawbacks, here are some for long-term trading.
-
Possibility of Wealth Erosion
If a company you have invested in does not perform as per your expectations, there is a higher chance of losing on capital invested. When there is a constant decline in the share price, it leads to wealth erosion.
-
Impacts of emotions
Share prices change every minute. If you cannot deal with your emotions like fear during short-term fluctuations, it will be hard for you to stick to your investment. It may make you miss the opportunity to earn significantly higher returns in the long run.
-
Premature Withdrawal Erodes Gain
For long-term trading, you may have to hold your investment for more than three or five years or even longer. Even if your investment allows exit, it may charge a fee that can erode most of your existing investment’s returns. If you need funds urgently, the gains made over the years can get eroded quickly.
You can conclude from the posts that there are more pros as compared to cons of long-term trading. Make sure you go through all financial records to choose a profitable stock or its derivatives or management profile in the case of mutual funds. If it suits your financial needs and profile, you can park your funds in a long-term investment in the stock market for significantly higher returns.