In investing, holding stock is a passive investment strategy in which the stockholder maintains ownership over particular stocks for a long period of time, especially during market volatility. A buy-and-hold strategy makes a stock a long-term investment, riding out stock market fluctuations rather than actively buying and selling on the stock market. Like all investment and trading strategies, holding stock has pros and cons.
The Primary Market: Where Stocks Are First Issued
Investor.gov explains that stocks represent your share of ownership in a company that sells them. Each stock is a piece of equity in a company. They are also known as equities and are one of the most common asset classes of investments.
The primary financial market is where companies first issue new stocks and make them available to investors, explains the Corporate Finance Institute (CFI). For instance, when a company issues its first initial public offer (IPO), this happens on the primary market.
Companies usually sell stocks in the primary market to raise capital for business reasons. For example, when a company wants to pay debts or expand and does not have money, its owners can sell some of its equity through shares to raise the funds needed.
The Secondary Market: Where Trading Happens
The secondary market is where investors, sellers and brokerage firms buy and trade existing stock investments, regulated by the Securities and Exchange Commission (SEC). Nasdaq, the New York Stock Exchange, the London Stock Exchange and Shanghai Stock Exchange are popular secondary markets.
Once you own a number of shares of company stock, you could sell them to other investors via the secondary market. Or, you may decide to hold onto them for a while.
Why an Investor Might Sell Stock
Reasons to sell your stock may include cashing in on high returns if the share price rises. Actively monitoring Wall Street and watching stock price movements to sell is the opposite of the buy-and-hold strategy.
You could also sell your stock to minimize investment losses during a downturn if the price of the stock is declining. Selling a stock while the price is high and repurchasing it at a lower price is called short selling. Navigating a short sale is a strategy for experienced stock market investors.
Why an Investor Might Hold Stock
In contrast to a short sale, holding stock is also referred to as having a "long position." If you are a beginner or average investor looking for a type of investment strategy that requires less expertise and active maintenance, you may want to hold onto your stock.
CFI mentions that "hold" is one of the three fundamental analysis recommendations by stock analysts, along with "buy" and "sell." A hold recommendation typically gets issued if the price of an asset isn't expected to change much and signals that buying or selling won't make much impact for an investor.
You might also choose to hold stock to ride market volatility.
Pros of Hold Stock
Reduction in Capital Gains Taxes
The IRS will tax you based on how long you hold stock. You will be charged short-term gains tax rates if you sell it within a year of buying shares. On the other hand, you will pay long-term capital gains tax rates if you hold it for at least a year or longer.
- Short-term capital gains will be taxed similarly to income, depending on total taxable income and filing status. For the 2022 tax year, that will be 10 to 37 percent for most people.
- Long-term capital gains tax rates range from zero to 20 percent, notes the IRS. Most individuals' tax rate on net capital gain is no higher than 15 percent.
By having a holding period of your stock, the tax rate you pay on your net capital gains is less.
Reduction in Transaction Fees
According to the Securities and Exchange Commission, stock transaction fees refer to the brokerage fees you must pay when trading your shares. Typically, investors pay a fee each time they make a transaction within the stock market.
So, the more you buy and sell, those transaction fees add up. Therefore, holding a stock reduces your transaction fees since you sell them fewer times.
Enjoyment of Dividends
Companies that make money may share some of their profits with shareholders in dividends the form of cash, stocks or other assets. If you sell your stocks, you are unlikely to enjoy such dividends.
Participation in Company Decision-Making
Common stock shareholders have a right to vote concerning the company and its direction, including electing new board members and voting for company policy.
However, if you sell your shares, you lose those rights. Therefore, holding stock is one of the best strategies for stock market investors who want some control over the fate of the company they partially own.
Enjoyment of Capital Appreciation
It is tempting to sell company stock when it is performing poorly. But the stock market tends to be volatile at times. However, given enough time, it will increase the value of your investments.
The capital appreciation the average stock experiences enables investors to make money in the end. A buy-and-hold investment strategy may help you enjoy a greater return. As with all investments, however, there is always a risk and never a guarantee.
I hold a BS in Computer Science and have been a freelance writer since 2011. When I am not writing, I enjoy reading, watching cooking and lifestyle shows, and fantasizing about world travels.