You may hold stocks as long-term investments because of their risk versus reward characteristics. As a benchmark for U.S. stocks, the S&P 500 has averaged 11 percent annual returns since its 1957 creation. This 11 percent average, however, includes one 38 percent gain in 1995 alongside one 22 percent loss in 2002. Rather than frequent trading, you may hold stocks throughout the economic cycle to target an average return, lower commission expenses and avoidance of mistakes.
At the initial public offering, corporations sell shares of stock to investors to raise cash. As an investor, you receive equity ownership in the corporation through your shares of stock. After the initial public offering, investors trade shares of stock directly between themselves in what as referred to as the secondary market. The value of your investment fluctuates alongside the profitability of the underlying business.
Holding stock may refer to your ownership of either preferred or common shares. Preferred shares carry superior asset claims to common shares. In the event of bankruptcy, preferred shareholders are paid first from the proceeds of any liquidated assets.
When holding stock, you gain additional value from dividend income and capital appreciation. Most companies pay out dividends quarterly to shareholders from their business profits. Capital gains refer to the difference in price between where a stock is currently trading and the point at which you bought it.
Holding stock does carry important tax ramifications because you are responsible for paying taxes on dividend income. At most, your dividends will be taxed as ordinary income. As of 2010, Internal Revenue Service ordinary income tax brackets are 10, 15, 25, 28, 33 and 35 percent. During tax season, your broker prepares a 1099-DIV form to categorize last year's dividend payments into either ordinary or qualified dividends. Dividends may qualify for special tax treatment when you hold a certain stock for more than 60 days.
Business conditions change over time, and any business model can become obsolete. Holding stock in perpetuity could result in large losses due to new technology. For example, the advent of the Internet has caused newspaper industry stocks to suffer.
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