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Summary
- Once a stock is bought, there are two options, either you can hold it for long-term or sell it after short-term gain.
- This decision entirely depends on an investor as to what works best for him depending on his financial needs.
Whenever you buy a stock in the market, there are two options, either you can hold the stock for a very long time without worrying about short-term fluctuations, or you can sell it within a short period of time after a profit or loss.
Both situations have risks attached to them. So, it is always better to understand what works best for you, depending upon your financial goals or risk-taking capacity.
Also read: How Can I Start Investing Safely?
It is up to an individual investor which option they would like to choose, but as an investor, we should consider holding a stock for a long time once it has been properly selected.
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Advantages of buying and holding shares
- Volatility: The foremost benefit of holding your investment for a longer period is that there is no need to be worried about the short-term fluctuations present in the stock market.
- No need to time the market: No need to wait for a perfect entry point for buying a stock as in the long-term, the market usually tends to rise. However, in case you are buying a stock for short-term, you need to be more cautious about the fluctuations.
- Save time: You do not have to invest your time in selecting stocks repeatedly and can continue to hold on once selected.
- Dividends: You will be entitled to get the additional return on your investment in the form of a dividend, which the company distributes to its shareholders in case of profits.
- Give your money time to grow: If an investor is selecting a stock based on the fundamentals analysis or future projects, the company will take time to perform, at least some quarters or may be years, only then the results will start reflecting in the stocks.
Disadvantages of holding shares
- You will not be able to capture the news-based momentum visible on some particular days, and it is only possible for short-term trading.
- If you are holding a stock for too long in anticipation of future gain and stock is not rising above your buying price, you will lose the purchasing power of money as inflation will increase, and your invested capital will remain at the same level or may fall below the original amount.
Individual choice
Remember whether to choose to hold on to your shares or sell them, you are liable to pay tax on your capital gain. Capital gain is the increase in value of your asset over the purchased price, which is considered only when an asset is sold.
However, if you are holding your shares in stock and shares ISA, capital gains on your investment are free up to an allowance limit. Whereas, if you are not having any stock and shares ISA and holding your shares outside it, you will be liable to pay Capital Gain Tax, over and above a threshold limit.
This threshold limit is called the annual exempt amount. For this tax year, which will end on 5 April 2022, the annual exempt amount will be £12,300. So, any investor whose capital gain is over and above this limit will have to pay capital gain tax. The basic rate for taxpayers is 10%, and the higher rate for additional taxpayers is 20%.
