5 Benefits of Holding Stocks for the Long Term

Posted on August 13th, 2024 by Quertime Writer in Make Money Online

Imagine planting a sapling and watching it grow into a sturdy tree. As the tree matures, it provides shade, fruits, and beauty over the years. Investing in stocks with a long-term perspective is much like nurturing that tree. It requires patience and care but the rewards are plentiful. When you think of long-term wealth creation, it’s essential to embrace a long-term approach.

In this article, let’s take a look at the five key benefits of investing in stocks for the long-term.

Why to Hold Stocks on a Long-Term Basis?

Let’s take a look at the benefits of investing in long term stocks.

1. Compounding Returns

Holding stocks over the long run helps your capital grow, thanks to the power of compounding. This allows your investment to generate additional earnings, which creates a snowball effect on growth. When you remain invested for at least a few years, you’ll realize how reinvesting capital gains and dividends can exponentially grow your investments.

Looking at history, let’s consider how Rajesh Jhunjhunwala made a fortune in Titan, purchasing the stock when it was valued at just INR 3 back in 2002. Over the next couple of decades, he held onto the stocks, and Titan reached INR 2,500 per share in 2021. This remarkable appreciation fetched him a return of nearly 83,233% in 20 years. This demonstrates the tremendous potential associated with long-term investing.

2. Reduced Risk of Volatility

Investing in the short term exposes you to market volatility. However, holding stocks for the long term can protect you from SUCH fluctuations. Long-term investors focus on the broader market trends that historically show growth over decades. Thus, the growth potential of their investment isn’t affected by price fluctuations in the short term.

Investing in the long term helps you ride out the ups and downs in the market. You significantly benefit from the upward trajectory of the stock price. It provides a sense of stability and confidence in your investment strategy.

3. Lower Transaction Costs

Frequent trading might seem exciting. However, it comes with associated brokerage fees and other costs that can erode your returns. Commissions, brokerage fees, and taxes add up quickly when you trade frequently on the web or stock market app.

With a long-term approach to investment, you minimize these costs. Fewer transactions mean lower expenses, which allows a larger part of your money to remain invested and grow. These small savings significantly enhance your overall returns over the years.

4. Capital Gains Tax Advantage

One of the often-overlooked benefits of long-term investing is the favorable treatment for capital gains taxes. In India, long-term capital gains, or profits from investments that you held for more than a year are taxed at a lower rate compared to short-term gains.

Currently, LTGG exceeding INR 1.25 lakhs in a financial year is taxed at 12.5%, while STCG has been increased from 15% to 20% after the latest 2024 budget. This means you keep more of your hard-earned money by holding stocks longer, reducing your tax liability, and boosting your net returns.

5. Dividend Growth and Reinvestment

Long-term wealth creators often invest in dividend-paying stocks to generate a steady stream of income. However, a better approach is to reinvest those dividends. Over time, many companies increase their dividend payouts, which grows your investment even more. Reinvesting dividends means buying more shares, which in turn generate more dividends.

Companies like Coal India and Infosys have a long history of increasing dividends, which rewards long-term investors. With this strategy, you can significantly grow your investment portfolio.

Conclusion

Adopting a long-term investment strategy is the key to creating wealth over the decades. When you hold stocks for the long term, you reap several benefits, ranging from the power of compounding to the potential for dividend growth and reinvestment. However, it’s imperative to choose the right stocks that can create long-term wealth.