Both short term trading and long term trading can be effective trading strategies, however, long term trading has several significant advantages. There are several benefits to long term trading, which include compounding and its effect on pricing, the chance to earn from dividends, a mitigated impact of price fluctuations, more alacrity in making necessary corrections and less time required to keep track of stocks.
Time is of the essence, and indeed that holds true for the investor, as it lets compounding time manifest itself. Compounding can be described as a mathematical concept wherein interest that is already charged on the principal would accrue interest on it, thus adding up to the total principal.
You can also hold a stock and thus accrue dividend payouts – this is a second way in which you can boost the value of your investment. Because there are companies that would allow you to reinvest your dividends with more share purchases, you can easily add to the existing value of your investment with little to no hassle. Dividends are also quite indicative of a business’ game plan and its overall success, a much better barometer than the invariably ambivalent market trends that often lead to price fluctuations.
Reduction Of The Impact Of Price Fluctuations
Long term investment has investors less impacted by short-term, albeit volatile price fluctuations. The market tends to address all factors that keep changing in the short term. So a person involved in long term investment or trading will not be affected as much by short term instability due to factors such as liquidity, fancy of a particular sector or stock which may make the price of a stock over or undervalued. Good stocks that may have been affected by several short term factors would then be able to bounce back in the long term and produce sufficient returns.
Long-term investors, especially those whose investments are more diversified than others, would be able to ride out the proverbial storm and make the most out of a down market – any drop in their performance would usually be negligible.
Faster Correction Process
It is highly likely that you could achieve a constant return over a long period. The reality is that there will be times when your investments earn less and other times when you make a lot of money in short term. There may also be times when you lose money in short term but as you are in quality stocks and have long perspective of investment you will earn good returns over a period of time.
If stocks fail to achieve the desired results not just once, but several times, then it would be justified if you would pull out of that investment. With a long term perspective based on quality stocks, it is easier to make decisions to change in a more timely manner without the urgency that accompanies short term and day trading strategies chasing volatile changes.
Investors that are able to plan ahead and stay in the market would invariably be the ones who ride the storm out and make the most out of those upward trends in the market – all they have to do is adapt a long term perspective of things with long term trading strategies.