Last Updated: Friday, July 21, 2023

Investing in Stocks: Short Term or Long Term for Better Returns?

For those who are addicted to gambling, stock market may look like a big casino. For those who are conservative in nature and are persuaded by a genuine feeling to make money, the stock market is a place to make a good investment. However, to beginners a stock market is just that, a stock market. Without understanding some of the basic investment strategies and terms you will never understand what it means to invest money, make profits and to lose a fortune out there.

Stock investment for beginners: long term investment vs short term investment

Beginners Guide to Stock Market

Stock market is where shares of companies are bought and sold by investors and traders. We know that companies issue stocks to get funds to expand their business. This is called the Initial Public Offering or IPO. A company’s main source of funds is through this IPO.

Once an IPO is over the shares no longer remain in the hands of the initial buyer. These buyers may want to sell it to someone who is willing to pay more money for the stock. So, a secondary market is needed for this transaction to take place. This secondary market is called a Stock Market.

Once it enters the secondary market, no money is received to the company from subsequent sale and purchase of the stock. However, the company will declare dividend on the stocks from time to time and those who are in possession of the stock at that time will get the dividend.

Types of Investment: The Short Term & Long Term

Most often people invest in stock market in two different ways. One is the Short term way and the other is the Long term. Both have its own set of pros and cons. Let us see which one is better for you.

The Short Comings of Short Term Investments

Short-term investment means that stocks are held for only a short period. Profit is made from the short term fluctuations of the stock prices. Those who invest in short term are referred to as Traders. These traders keep a constant vigil against sudden price movements and of any news that could make a huge difference in price of the stock.

By investing the Short term way could earn you huge profits in a limited span of time. There are traders who make a fortune over night. Just a single news or a change of guard at the company could signal a rally which could turn the trader into a rich man within a few minutes.

However, there is a downside to this. The higher we can earn, the riskier it is. There are also traders who turned out to be a pauper overnight. Besides, there will be news that could change the fortunes of the company for the worse. If you had bet on a positive news and invested heavily on it, then you will lose big time when the news comes out negative.

To be a successful trader you need to invest more than just money. You got to invest your time and intellect as well. If there is any chance to make money in the short term, you got to be a full time trader. It is quite impossible for those who have other jobs and careers to sit in front of the computer and look at the price variations.

More than that, you need to do continuous research on the company, about the current market situation, the news that might affect the price of your stocks, the political situation, and the interest rate whatever. It is like keeping updated about everything under the sky. Now how will you juggle all this with the pressure of your full time job? It will be an exercise in stress and patience. Therefore, if you opt to trade in the stock market, the best thing is to be fully involved in what you do. In addition, pray a lot because you really need God on your side to keep that luck going in your favor every time you buy or sell your stock.

The Long Run Benefits of Long Term Investments

Long term investments on the other hand hold stocks for a longer period with a belief that business improves with time and thus the stock price too moves upward. Those who invest in this method are called Investors. They are never in a hurry to make money overnight. They believe that patience is a virtue. 

Moreover, there are some benefits of holding your stock for longer periods, which a short term investments doesn’t provide. History witnessed that greatest multibagger stocks performed in long term investment only.

Dividends: When companies are performing extremely well, the management decides to share the profits with the share holders. Thus they declare dividends on the shares. Some good companies declare dividends regularly that are a source of income for the shareholder. If you buy a stock for a long period, you will get a regular flow of income from these dividends.

You might like also: Why you should avoid high dividend paying companies

Bonus Shares: Just like dividends, the company also declares bonus share from time to time, which is another source of income. Existing shareholders are offered with free stocks of company in the form of bonus shares. Short-term investment buys and sells shares within a short period thus usually missing out when bonus are declared. They might have already sold the share before it was declared.

Stock Splits: Sometimes companies increase the number of shares but keep the capitalization same to increase liquidity. This happens when the price of shares increases manifold and it becomes expensive for small time traders and investors to buy it. This lowers the liquidity of the shares. Which is easy for you to buy; a share at Rs 2000 or a share at Rs.50?

By being a long time investor you can have your stock split when the company declares it. Though the capitalization is same, you can profit from it over time because now you have more than one share of the company from which you are getting your income.

Decreased Capital Gains Tax: You can enjoy decreased Capital gains tax if you hold the stocks for more than one year. This helps you to save on tax and thus increasing your income.

Increased wealth if the stock does well: Mostly stocks are on the rise in the long run because as with every business, it takes time to build up a thriving company. The company stocks may take a beating or rise rapidly in the short term. If you can keep your cool through it, you can make a huge fortune by the wealth the stock makes for you in the end.

If you are planning to invest in Stock Market and is not willing to part with your present career, it is better you stick with a long term investment strategy. That will do you immense good. It could turn out to be your retirement fund. However, make detailed study about the company and its future prospects as a business in the long run.

The good news is that you need not spend all your waking hours trying to find out in the news or elsewhere about the price movement of the day like a short time trader.

 How to Diversify your Investment Portfolio?

The Perfect Investment Diversification Ratio

There are magical numbers in life. No wonder we think twice before choosing the number ‘13’ and choose the number ‘9’ or some other lucky number. In the world of investments, there are numbers that can turn out to be quite fortunate, which means these numbers will give you better returns.

The Lucky Number

The ‘60:30:10’ is a number as well as a ratio that is considered ‘lucky’ in the investment world.

This is considered lucky because financial experts believe that if we allocate our investments to Stocks, bonds and gold in this ratio, we can get a return of 15% during times when stocks perform well. Moderate performance of the equity markets will turn out investments in the range of 12% to 15%.

You may think what’s so hot about this. After all, it’s only natural to think that if you had invested all your investments in equities, you might have received much more returns than this. However, you make the usual mistake while thinking like this; you fail to factor in the risk. Putting all your investments in stocks alone could attract that much risk, which you might not be ready to face.

60% in Stocks: While investing according to this ratio, you are effectively diversifying your investments in such a way that your risk is reduced and your profits maximized. 60% of your investments in stocks is from where you are supposed to get the maximum amount of returns during a good year.

30% in Bonds: The next 30% in bonds are considered to offset your risks in stocks. This helps you not only to reduce your risks but also to get moderate risks that could augment your income from stocks or supplement it when stocks are failing. You would be the wiser if you see to it that you invest in Government bonds together with corporate bonds.

10% in Gold: The next 10% is invested in gold and with good reasons too. With the recent performance of gold, it has emerged has the most-demanded-investment option in a portfolio kitty. From the beginning of this century, this metal has risen by an astonishing 528%! Now who would not want such a high-performance asset?

Another benefit of having gold in your portfolio is that it is a sure bet against inflation and its effect. You are familiar with the fact that inflation reduces the value of money. You need to invest in something that doesn’t go down in value. Gold is something that doesn’t depreciate in value, especially during times of recession like the one we are facing now. Besides, when markets are not performing well, the returns from stocks will also dwindle. In such cases, investing some money in gold is a good idea.

Investing in physical gold will not yield returns, though. The profit is made by buying gold at low prices and selling at high prices. There are no returns for holding it as is the case with stocks (you get dividends for holding it).

How to Use the Lucky Number for Conservative Investors

What makes this number or ratio really special is the fact this can be used by all kinds of investors, whether they are high-risk takers or conservative investors. No matter what, the ratio stays the same. It is only the investment options that need to be changed.

For high-risk takers, 60% of their investments were invested in stocks. When it comes to conservative investors, they can invest either 60% of their money in gold or in bonds. This reduces their risks considerably, but a down side with this is that returns are also bound to reduce.

Nevertheless, with the recent spike in gold prices, it seems that gold can bring in high returns after all. Therefore, such an investment during high inflationary periods will be useful to protect your wealth from losing its value.

Investing 60% in bonds, which are a go-between gold and stocks, is considered worthwhile for conservative investors, who do not mind taking a bit of risk. It will give you timely returns unlike gold, which gives you money only when you sell it.

Conservative investors need to just invest 10% in stocks on account of the risk it posses. The 10% investment in stocks is just required to get a decent amount of returns for the investor.

While investing in stocks it is better you invest in a good mutual fund rather than investing directly. If you are adamant about investing directly, then study your stocks well or invest in blue-chip companies that have a history of high and consistent performance.

Likewise, while investing in gold too it is better not to invest directly in commodity markets. This could be highly risky. Either buy physical gold, invest in funds that offer investment in gold or go investing in gold ETFs.

The 60:30:10 ratio doesn’t guarantee you a fixed 15% returns for all kinds of investors. It is just that the ratio is the perfect way to reduce your risks and maximize your profit. Any other combination will either fail to minimize your risk or maximize your profit. This is the perfect blend. So next time you think about investments, ensure that you cook your investment meal with the right amount flavors added in the ratio 60:30:10.

"If you have any query on the current article please free to contact us by just dropping you message here, I will soon be in your touch."


No comments:

Post a Comment