1. Lower tax rates as compared to short term or intraday investments
When you invest your money in the stock markets for a short time duration, the taxes applicable on the gains to generate through these investments is taxed at a higher price level, than the taxes applicable on long term capital gains. Here short term means any stock holding which is sold within one year of purchase and long term means gains accrued from stocks sold after one year of purchase. In India, STCG is taxed at 15% percent whereas LTCG is taxed at 10% hence, making long term investment more tax beneficial than short term capital gains.
2. Override the possibility of negative returns
When you invest money in the stock market for a long run, the possibility of getting a negative return in a well diversified portfolio is almost negligible, because the general trend of markets and prices is always upwards. Correction or fall occurs in the market because of certain uncontrolled happenings, which work against the companies. However, the stock market in general often digests these happenings and starts its upward course again. Hence, when looking at the long term with optimum diversification, there are quite few chances that your investment will give a negative return. This can be a possibility for short term investments or intraday trades, but in case of long term investments in stock market where the position is held for more than 5 years there will most likely not be any negative return.
3. Potential to get exponential return
On the contrary to the possibility of negative return, investment in the stock market for a long term has the possibility of earning you exponential gains as stock prices are highly volatile and sentiment driven. A good organization which has a lot of things going in its favour and has strong fundamentals can see its stock prices increasing multifold in a short span of time and can become a ‘unicorn’ stock in the market. If you invest your money in such unicorns, then surely, there are chances of earning exponential growth overtime.
4. Lower commissions and overhead expenses
Just like the applicable taxes, the charges that you have to pay for a long term account are quite less as compared to charges you have to pay for short term trading or intraday trading. Many brokers charge a fixed fee for every trade. This is called discount broking, as opposed to traditional broking where the brokerage was paid in percentages. Thus, long term trades help you in saving on the additional brokerage costs.
5. Compounded returns in case of dividend paying stocks
If you have begun investing in the long term stocks with a sizeable investment capital, then surely you would have some blue chip stocks or defensive stocks in your portfolio, which can help you generate decent interest through dividends as well. If you do not withdraw these dividends and reinvest them in the blue chip company stocks, then the accumulated interest generated will start getting compounded over a period of time, much like the compounding which occurs through other asset classes such as mutual funds or other government schemes.
Conclusion:
All these benefits of long term investment in stock markets makes it lucrative for people to invest money in this vehicle. If you have evaluated the value of long term investment and are ready to put your money in stock markets for a long term, then you must proceed to the next steps, which include proper stock selection and diversification. Without these two factors working in your favor, long term investments in stock markets might not give you the desired result.
A certified and registered investment advisor can guide you with both the above things and make sure that your investment plan is well diversified, hedged and contains the right stocks according to your risk appetite. Post that, it would only be a matter of regular monitoring of your investments and your money would start working for you!
