The trader as per this strategy adopts the simple and straightforward approach for investing in stocks. This strategy is popular with the non traders, as not much analysis and research is involved on a continual basis. It is obvious from the name of the strategy that an investor buys a stock after some consideration while entering the trade and holds on to it indefinitely. Such trades are long trades, because of the firm belief of the investors that over the long run the shares market will move up.
In principle, this strategy looks sound. Entering a trade and holding on to it on a long term basis is a perfectly legitimate activity, but from the point of view of business, there are definite chances of the trader ending up in losses.
Buy and hold is not an immutable strategy that has nothing do with the market dynamics. Like all other strategies of investment, this strategy too has limitations. Such trades are entered into by an investor with the belief that the company is a profitable or potentially profitable company. This is not a solid reason for doing a trade, as it does not take into account the market dynamics. When the downtrend seizes the market, it does not spare even the best rated shares, in view of the totality of the market situation. Economic view of the said company which the trader thinks is all important is not going to help the issue.
In the absence of an exit strategy, the trader who is confident while entering the trade does not have the correct estimate at what price he will exit the trade. They will go on holding the share for an indefinite period (of course receive dividends), not knowing what to with it when the share price begins to move downwards, panic and finally exit the trade at loss.
When you buy and hold a long term trade, you need to know that you have entered the risk zone, unlike the fixed deposits in a bank, where you are assured of interest at an agreed upon rate. In this strategy, the entry time is very important. If you do the trade on a high price and are unsure about the exit level, chances are that you will end up in loss. So, thorough understanding of the market dynamics is important for this trade.
Many share market pundits, analysts and researchers, whenever major corrections take place in the market, discourage the investors by averring that buy and hold approach is dead. You are advised by them to invest money in the banks or reach out to market-timing professionals.
You need to understand the correct import of buy and hold strategy. Is it like buying at the top and hold for ever? If the timing of the investor for entering the trade is wrong, why blame the strategy? The investor who has made the mistake will have to suffer the consequences. Mindless purchasing of shares is not proper form of investing. You need to evaluate the fundamental value of the shares of the company in which you are going to invest. The belief that every share will give huge profits in the long run is incorrect.
First make a loose interpretation of this strategy and then blame all concerned for the losses, is no good. Instead, know that this strategy is quite scientific, and a business-like approach is required in its application. Select quality companies, the market value of whose shares are at a discount as compared to their underlying economic value. Buy such shares and holding on to them for relatively longer period, cuts down the transaction costs. Where is the question of holding on to the shares indefinitely? A correlation exists between corporate profit growth and long-term share price appreciation, but one has to decide when to exit the trade even for long term investments.
Investors should consider a comprehensive investment plan and construct the portfolio with the expert advice of a broker or a financial consultant. With this backgrounder, buy and hold stock strategy is likely to fructify and prove highly beneficial.
By Micheal James
Article Source: http://EzineArticles.com
