How Long Should You Hold a Stock? Basics & Benefits Explained
Investing in the stock market involves three actions. Buying, selling and holding. Let's understand what is holding, how it works, what is the ideal holding period and more.
Picture this: you're a seasoned investor with years of experience in the stock market. You've made successful investments in the past, but you're always looking for ways to maximise your returns. You've recently invested in a company with promising growth potential, and you're wondering how long you should hold the stock to reap the maximum benefits. Should you sell it after a short while and book your profit, or should you hold onto it for a longer period and see if the company's growth trajectory continues?
In this blog, we'll explore what an ideal time to “hold” a stock, the benefits of holding stocks and provide insights into the best time to buy and sell stocks to achieve optimal returns.
What Is Holding a Stock?
In simple language, the practice of purchasing shares in a company and not selling those shares over a period of time is known as holding stocks.
Investors can take three actions with their investment assets – buy, sell or hold.
Buying involves acquiring an investment asset, hoping its value will increase and generate profits when they are sold. Meanwhile, selling is disposing of an investment asset in exchange for cash to realise profits or minimise losses when its value has declined. Holding means keeping an investment in one's portfolio with the expectation of value appreciation.
In the stock market, the term "hold" refers to an investor's decision to keep their current position in a particular stock instead of buying or selling it. Holding stocks can provide several benefits, including long-term growth potential, regular dividend payments, reduced risk through diversification, and tax advantages such as lower rates on capital gains for long-term investors.
What Do Analysts Mean When They Recommend “Hold”?
Financial analysts and brokers evaluate a company's financial performance and other factors to provide a recommendation on its stock. This evaluation includes reviewing the company's financial statements, industry and market trends, future prospects, and valuation. Analysts determine whether a stock is undervalued or overvalued and consider external factors that could impact its growth. Investors need to consider these recommendations and their own research before making investment decisions.
A "hold rating" or "hold recommendation" is given when a stock is expected to perform moderately well in the short to medium term without any compelling reason to buy or sell it.
While a hold recommendation suggests that the stock is not expected to perform exceptionally, investors should also consider their investment goals and risk tolerance before deciding to hold, buy, or sell a stock.
Holding a stock can also mean receiving dividend payouts and having voting rights during a company's annual general meeting. Investors may hold stocks for various reasons, such as capital appreciation, passive income, and long-term investment goals. The strategy of holding a stock is also known as buy-and-hold.
Holding onto individual stocks does not mean it is for eternity. It means that for now, the best bet is to hold. In future, the stance on the stock may change. This is the sign you need to keep looking out for if you decide to hold a stock for the long term.
Are There Any Benefits Of Holding Stocks For The Long Term?
Long-term investments have several benefits.
· Historical advantages indicate a rising trend in the stock market, and most stocks correct small dips in the long run, provided the company performs well.
· Long-term investments offer a great learning curve for investors, enabling them to understand their risk appetite and make informed decisions over time.
· The power of compounding is a significant advantage of long-term investing, where returns are credited to the investment, and the compounded amount earns returns.
· Long-term investments also encourage non-emotional trading, where investors can overlook small losses and avoid emotions from controlling their investment decisions.
If you look at this long-term (20-year) chart of Nifty50, you will see that, despite all the small drops in the short term, the broader direction is always on the upside.
However, before you decide whether a stock is good for a long-term stock hold, make sure you analyse the company well and actually believe in the company’s long-term potential. Don’t hold a stock based on analysts’ recommendations or market hearsay.
When To Sell A Stock?
The ideal time to sell a stock is when you believe it has reached its maximum potential or a better investment option emerges. It's better to sell it sooner than later if you have miscalculated or invested in the wrong stock.
However, it's crucial to avoid mistaking minor losses for a downtrend, which can lead to unnecessary losses. Therefore, a thorough analysis is necessary before deciding to sell a stock.
A good way to approach this would be to set some rules for yourself. If you follow systematic stock investing, you probably already enjoy the benefits of rupee-cost averaging. Certain parameters can also help you decide when to exit a position.
For instance, you may set a price target when buying a stock. Once the stock has reached that target, consider selling it. Or, you may have a time horizon in mind, say 10 years. At the end of that duration, you may decide to sell if the stock has shown considerable growth or regardless. Another approach would be to have a stop-loss in place. It may be a good time to exit if a stock has dropped about 10 or 15% from its peak.
Deciding when to sell a stock can be a challenging decision to make. However, if you follow a set of predefined rules you have made for yourself, the process becomes easier.
Should You Hold A Loss-Making Stock?
Investing in the stock market makes it inevitable for traders to incur losses at times. It may be tempting to hold onto a stock that is losing value, hoping it will eventually rebound. Although investors may experience losses while investing in the stock market, holding onto a losing stock can have advantages and disadvantages.
One benefit of holding onto a stock is the potential for recovery due to temporary market dips or industry changes. It can also help avoid making emotional decisions and offer tax benefits. The key is to look at the fundamentals and decide based on them. If a stock is declining with poor fundamentals, it might be good to sell it; however, if the stock has faced a correction due to external factors such as an economic downturn, market crash, etc. It might not be a good idea to sell it then.
However, the cons of holding onto a losing stock include the opportunity cost of tying up money in an investment that isn't generating returns and the exposure to company-specific risks such as poor management, declining revenues, or legal issues. It is crucial to set a clear stop-loss point and sell the stock if it falls below that level to minimise the risks associated with holding onto losing stocks.
To balance your portfolio, investors should periodically remove loss-making stocks but not panic during minor corrections. To know when to sell, follow these rules:
1. Sell if losses exceed the expected risk-reward ratio.
2. Sell if the stock falls below the stop-loss or support zones.
3. Don't hold a stock for tax losses, as you might lose more trying to save some money.
What Is The Ideal Holding Period?
Now, the question might be, 'How long should I hold on to a stock then'
Although there is no single answer to that question, ideally, staying invested in your stocks is the best way forward if one is not running short on funds. Some investors advise staying invested for years since long-term holding helps tide volatility and makes you a profit. A stock that you hold on to for 10 years could give you good returns, but at the same time, you could have missed an opportunity on a different stock which could have yielded higher returns in the same period.
On the other hand, you may choose to follow certain systems or models that help you decide how long to hold your stock. For instance, as a systematic investor, you may follow the momentum investing model, or the buy high, sell higher model. The momentum investing model is a strategy where investors buy stocks that have recently been performing well and sell stocks that aren’t performing. Investors typically look for strong relative strength over a three to 12-month period. Here, you get an estimated timeline to hold the stock and exit it regardless of the outcome at the end of that period.
Are There Any Risks With Holding Stocks?
Holding a stock comes with risks that investors must be aware of. The primary risks associated with holding stocks are market, financial, and liquidity.
- Market risk arises from unpredictable fluctuations in the stock market due to macroeconomic factors such as global crises and interest rate changes.
- Companies with weak financial positions cause financial risk, high debt-to-equity ratios, or low credit ratings, which can slow growth and affect stock prices.
- Liquidity risk is when stocks are traded infrequently or have insufficient buyers or sellers, making it difficult to sell them at a fair price.
But if you are careful enough and do your thought research before purchasing a stock, holding on to it gives you greater rewards than trying to find the new winner and running after it.
· Holding a stock indicates that one has already purchased the security and is keeping it in their portfolio, expecting its value to increase over time.
· Analysts and brokers make hold recommendations on a stock based on factors such as company financials, valuation etc.
· There are several benefits of holding stocks. Stocks that are held for the long term are better than stocks held for short periods of time.
· Stock market trading is highly unpredictable. Investors can incur huge losses even after taking calculated bets. However, analysis, patience and a goal-oriented approach can help investors make profits.