Both short term and long term trading can be effective trading strategies, however, long term trading has several significant advantages. These include the effect of compounding, the opportunity to earn from dividends, reduction of the impact of price fluctuations, the ability to make corrections in a more timely manner, less time spent monitoring stocks.
1. Compounding: Time is an investor’s best friend because it allows for compounding effect to take place. Compounding is the mathematical process where interest on your money in turn earns interest and is added to your principal, and if the stocks or equity mutual funds are selected carefully, it can give very good gains over longer time frame.
2. Dividends: Holding a stock to take advantage of payouts from dividends is another way to increase the value of an investment. Some companies offer the ability to reinvest dividends with additional share purchases thereby increasing the overall value of your investment. Additionally, dividends are more a reflection of a company’s overall business strategy and success than volatile price fluctuations based on market emotions. Continue reading →