Stocks provide investors with an excellent opportunity to realize long-term gains, and it’s not unusual to see stocks increase 10 percent or more over time – often within years or decades!
Short-term investments come with risks you shouldn’t ignore, so speaking to a financial advisor about them can be very helpful in making informed decisions.
Investing for the Long-Term
Stocks and stock mutual funds offer long-term gains with limited risk. Individuals investing for long-term goals such as retirement typically have enough time to withstand market downturns while using compounding power to maximize returns.
Long-term investors with long-term investing goals are in a prime position to take advantage of potential gains and attractive tax rates by using dollar cost averaging, an investing technique which enables investors to continue purchasing securities even during periods of fluctuating price levels.
Investors looking for shorter-term savings goals should consider short-term investments as a strategy for reaching them more quickly. Shorter-term strategies tend to have lower market risk but don’t guarantee gains or principal value retention. Also consider investments with relatively low market risks, like certificates of deposit (CD), money market accounts or government bonds which can usually be converted to cash within 12 months.
Taxes
Financial experts generally advocate investing for the long haul when purchasing stocks. Short-term trading may work for those with more experience and capital available to them; however, making an ongoing commitment will reap many additional advantages.
One major advantage is lowering your taxes. Short-term gains are subject to higher rates than long-term capital gains; but if you hold shares for more than 12 months, any gains qualify as long-term capital gains and are taxed at lower rates.
Long-term holding allows you to take advantage of the compounding effect and reap exponential returns by reinvesting dividends, creating exponential portfolio growth with reduced transaction fees and market fluctuations. Finally, holding stock for longer is often more cost effective than frequent buying and selling as it reduces transaction fees while mitigating short-term market fluctuations.
Dividends
Stock dividends are payments companies make on an ongoing basis to shareholders in the form of regular payouts called stock dividends. Each dividend payment is calculated per share owned, so owning more shares equals higher dividends. Investing in companies offering stock dividends provides steady returns without selling off shares, and reaping compound interest benefits with reinvested dividends.
There are various kinds of dividends, from cash dividends paid directly into investors’ brokerage accounts, and stock dividends given out as extra shares of stock by companies to investors – the latter can dilute share price but isn’t considered taxable income until sold.
Many investors choose to pocket their dividends, while others may prefer investing them back in the company that pays them through a dividend reinvestment plan. This approach can help them grow their investment slowly over time.
Market Timing
Market Timing refers to the process of purchasing and selling financial assets based on anticipated price fluctuations. Unfortunately, market timing can be tricky to master consistently; missing out on key days such as tax day can have a dramatic impact on returns.
Timing the market can be costly as you must pay transaction fees each time you buy and sell, with short-term investments incurring higher transaction fees than long-term ones.
Long-term investing will allow you to avoid being lured into cashing out when prices dip, thus helping avoid temptation of trading out immediately when prices decline. While investing when prices decline may seem risky, history shows otherwise; over time the markets always rebound eventually. Furthermore, investing over the long haul allows more time to take advantage of long-term gains provided by stocks as well as lower taxes than selling your investments immediately; capital gains tax rates are lower than regular income rates.
