When it comes to investing in stock markets in India, there are numerous paths one can take. Long term investing in stocks is one of the best ways to invest in creating wealth.
Intraday traders try to time the market and catch the highs and lows. While they might taste some success in their initial trades, in the long run, the disadvantages of intraday trading far outnumber its benefits by a huge margin. On the other hand, long term investment in stocks offers countless advantages that intraday traders simply can\’t take advantage of. Here are a few reasons why long term investing in stocks is much better than intraday trading.
Long term investment in stocks does not involve emotional investing decisions
Long term investing in stocks completely does away with emotions in investing. This is because when you have a clear long term investment mindset, you will not be excited to sell stocks when you see a jump of 10% or even panic and exit when markets are crashing due to some international issues like Brexit or rising oil prices for example. By remaining invested in long term you are simply giving enough time to the business to grow and realize its actual potential because no business can grow overnight.
Compounding works in your favour with long term investing in stocks
Long term investing in stocks enables you to take advantage of compounding as well the ability to reinvest your dividends over time which will enable you to generate even bigger profits. When you invest for long term, time is your greatest benefactor.
Most stock market investors must have read about the enormous wealth created by long term investment in stocks of technology giants, Infosys and Wipro. However, there are plenty of other stocks too in the market which have created substantial wealth for long term shareholders.
Take HDFC Bank stock, for example, which has been one of the greatest wealth compounders in Indian stock markets. If one had bought 100 shares of its stock on 2nd Jan 2001 for Rs. 22.44 and held on to it till today, the price will have gone up to Rs. 1587 per share. That’s a whopping gain of over 5400% in 20 years. That means the initial investment of only Rs. 2244 in the year 2001 would have grown to Rs. 121,600 simply by buying and holding the stock of HDFC Bank. That’s the power of compounding.
Some other examples of stocks which have multiplied investor wealth by multiple times when held for long term include stocks like Bajaj Finance, Eicher Motors, Maruti Suzuki, Asian Paints, Reliance Industries, Pidlite Industries, MRF, Ultratech Cement and Hero MotoCorp to name a few.
Long term investing in stocks is stress-free
Rajesh Desai is a self-employed software developer who makes custom payroll and inventory-control software for small to medium sized enterprises. Apart from this he is also an active trader in the stock market who indulges in both intraday and short-term trading.
He starts his work at sharp 9.15 every morning and works late till night as on most weekdays as he is too occupied with his trading activities till 3 PM hampering his software development work. To make up for it he works till late night in his software development activities. This dual role combined with high stress and irregular sleep patterns has not only taken a toll on his physical health but also strained his family relations. Although he stays with his wife and 2 children, he is able to spend quality time with his family only on the weekends when the markets are closed.
Rajesh Desai is not alone. There are thousands of traders out there who constantly juggle between trading and their regular day to day work without realizing how high frequency trading is affecting their profession as well as increasing their stress levels.
Intraday and short term trading are highly stressful. Intraday traders are constantly hooked to their computers or mobile phones so that they don’t miss out on opportunities. This highly impacts their other activities and day to day work causing high levels of stress. On the contrary, long term investing in stocks means one does not have to wake up at the opening bell every day to check whether your portfolio is going up or down. Investing in good quality businesses is a definite way to keep your portfolio volatility low, which in-turn makes investing a stress-free experience.
Long term investing in stocks enables you to save more on taxes and commissions
Active trading involves frequent buying and selling of stocks which means not just higher brokerage costs, but also higher taxes as short term capital gains are chargeable at a higher rate than long term capital gains applicable on selling stocks after holding them for a period of 1 year or more.
On top of it there are other charges too like Securities Transaction Charges (STT) and GST which further lower the profit.
To give you an example let’s take a look at the various charges involved in an intraday trade of buying 1000 shares for Rs. 100 and selling it for Rs. 102 with a full-service broker. In this case the total turnover would amount to Rs.202,000. The brokerage charged would be Rs.101 while an STT of Rs.25.51 would be applicable. Besides this SEBI turnover fees of Rs.0.30, stamp duty charges of Rs.4.04 and GST of Rs. 19.36 would also be applicable. All these charges will reduce the overall profit generated from intraday trading.
Surprisingly most intraday and short-term traders tend to overlook this crucial aspect involved in trading which silently eats away their profits. It is equally important to remember all these charges are payable by the intraday trader, irrespective of whether he makes a profit or loss.
Bottom line: Long term investing in stocks is best for wealth creation
Given the huge stock market volatility, the odds of making losses over profits are very high in intraday trading. That’s is why long-term investing is considered as a hassle-free and reliable way to create wealth from the stock market.
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This article was last updated on 03/03/21