What is Buy and Hold investment?
It is a technique of investing and profiting in stock market. It is a long term investment strategy.
The world is evolving. In the process of evolving in spite of ups and downs every field and every industry is ultimately growing. Similarly all financial markets, in spite of good times and bad times, give a good rate of return on investment, in the long run.
This is the basis of buy and hold investment strategy. For a small investor who does not care to analyze the market, does not know to shift the sectors, cannot buy on the lows and sell on the highs, it is better to buy blue chip or budding blue chip company stocks, with a good spread, and hold them for long (very long) period of time. At the extreme, such investors are advised to hold the stocks indefinitely, and sell only if they need that money.
The outcome of this strategy is very much improved by Fundamental Analysis.
However be aware and beware that many fundamentally strong companies have seen the ditch when hit by the time and tide.
Transaction costs are minimum. Since there are hardly few buys and sells in a year, transactional cost becomes negligible. Shorter the duration, we will be making more number of trades, there by increasing cost of trades.
As the company grows, the dividends and bonuses are added to the net investment. Some profiting companies declare good dividend each year. It can be any where between 3-5 percent to 30-50 percent. This alone is a good return on your investment.
$21 invested in 1 share of Microsoft's IPO on March 1986 is worth $9216 at $32 in May 2013 due to 9 times stock split. It has given 43885% of returns in Buy and Hold strategy
Apart from that some companies convert the profit into shares and allot them to the share holders. So the portfolio grows several folds in about 20 to 30 years. It is a great piece of asset at the time of retirement.
There is also tax benefits in long term investment. If you hold the stock for more than a year, the tax is calculated under different slab, which is much lesser than the usual tax for short term investment.
On the whole time spent for investment is much less compared to medium and short term investment. Very long term investment is not time sensitive while in shorter term investment you have to take timely action.
If the trade taken is wrong then the time wasted in holding the stock is quite annoying. In short term trading if a trade picking decision is wrong then time wasted is not much. This affects greatly on the ultimate profit.
Very long term trader has to go in for Fundamental Analysis for investment decision, which requires a huge number of parameters to be considered. Where as in shorter term investment we make our investment decision based on Technical Analysis. The parameters used are price, volume, open interest and time.
The fundamentals can change over a period of time. The political scenario, war and famine, supply and demand of the products, etc; etc; can all affect the outcome of the profit. Most of the shares which were good a decade back are not doing well today.
Trader's delight and owners pride one decade back. Today interest has dried.
You will not be able benefit from the price swings in holding the shares for long. Where as in shorter term investment like swing trading you can catch most of the swings. The sum of the price swings will be several times more than the total movement of the price.
Warren Buffet is a classical example, who advocated long term investment. He is among the richest in the world.
On the contrary to very long term investment, at the other extreme is day trading, where a trade is closed in a few minutes to a few hours. The investment period never goes beyond a day, for by definition all trades are closed by the end of the day.
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