What is a Buy and Hold Investor
Stock trading is a complex activity. There are experts on every trading method, and analysts giving their top ten stock picks for every kind of stock and bond. It’s easy to be overwhelmed by all of this information, but for investors, beginning investors in particular there is a strategy called buy and hold investing.
A buy and hold investor is an investor who holds a stock for the long term, ignoring the movement of the market, in favor of long term appreciation of value. The expectation is that at the end of the holding term, the stock will have gained value.
A buy and hold strategy can be a good strategy for a few reasons:
It causes less stress
Investing costs are lower
Taxes are lower
In an active trading strategy, traders must constantly be watching the market for split second opportunities to profit from. Often times traders utilize leverage to take advantage of small increases and decreases in stock, and try and capitalize to make as many profitable trades as possible. This is called Day Trading, and is not for the faint of heart. Entire life savings can be wiped out in seconds with the wrong decision.
A buy and hold investor will consider the financials of a company they are investing in, it’s business strategy, market presence, and will then invest in shares. After that, a buy and hold investor will follow the news about that company and keep an eye on it but will leave the company to run itself. It can be compared to being a partial owner.
Each time a stock is traded, a commission is paid to a broker. While there are several discount brokerages available, an active trader can incur a lot if costs if they trade multiple times per day. These costs force them to maximize their profit with each trade and cover the cost of the trade.
A buy and hold investor will usually save money because they are making fewer, and larger investments. This will increase the overall profitability of their portfolio because there will be more money to invest and less to pay out.
Any gains that are made when a stock is sold are taxable, so in a case where an active trader makes a large sum of money on a hot stock, they now have to give the government their share as well.
A buy and hold investor, by contrast, holds their asset for a long period, and if you hold loner than a year, you will be taxed at a lower rate, and only when you sell.
Another advantage of buy and hold investing is when the stock is a dividend stock. These stocks pay a share of the profit each quarter to the shareholders in cash, or an investor can often choose to reinvest the dividend into purchasing more shares. It’s a great way to increase the value of the portfolio without anymore capital invested.
There are disadvantages to buy and hold though. One is that the returns will not be as high, or may even be none at all. For the stock to make money it has to rise, so if the stock stays the same, or drops at some point and recovers back to the level of the initial investment, no profit has been made.
Companies can also go bankrupt, causing the investor to lose their initial investment. To counter this, diversity of stocks is a key to security.
One of the most famous buy and hold advocates is Warren Buffet. If one of the richest men in history uses it, it can be that bad of a strategy.