Buy and Hold

How Buy and Hold Works

Conventional investing wisdom shows that with a long time horizon, equities render a higher return than other asset classes such as bonds. There is, however, some debate over whether a buy-and-hold strategy is superior to an active investing strategy. Both sides have valid arguments, but a buy-and-hold strategy has tax benefits because the investor can defer capital gains taxes on long-term investments.

To purchase shares of common stock is to take ownership of a company. Ownership has its privileges, which include voting rights and a stake in corporate profits as the company grows. Shareholders function as direct decision makers with their number of votes being equal to the number of shares they hold. Shareholders vote on critical issues, such as mergers and acquisitions, and elect directors to the board. Activist investors with substantial holdings wield considerable influence over management often seeking to gain representation on the board of directors.

Recognizing that change takes time, committed shareholders adopt buy-and-hold strategies. Rather than treating ownership as a short-term vehicle for profit in the mode of a day trader, buy-and-hold investors keep shares through bull and bear markets. Equity owners thus bear the ultimate risk of failure or the supreme reward of substantial appreciation.

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