Buy and Hold Definition
Buy and hold is the strategy of the investment where the investors buy the security and hold it for a longer period of time regardless of the fluctuations of short term nature and the conditions that prevail in the market. Investors following the strategy of buy and hold rely on the idea that the change takes time and by their commitment, they can earn a good return. Investors invest in the stock of the companies after considering the company’s fundamental analysis and they see the stocks as the investment and do not give the focus of timing each of the move. The logic which prevails behind this strategy is that economy of the country will grow over the time and by the way of avoiding the sale of stock during the cyclical downturns which are normal, ultimately the trader will be more successful.
Example of Buy and Hold
Mr. X believes in the strategy of buy and holds as he believes that return in the long term will be more and he doesn’t have the time to watch the short term fluctuations in the prices of the stock in the market.
In June 2013 he saved $2300 and invested in Facebook Stock. In June 2013, the closing prices of the stock of Facebook on the date he purchased the stock were $23 per share. So with the $ 2,300 amount he bought 100 shares of Facebook at the price of $23 per share.
He holds the stock for 11 years and sold all the shares in July 2019 when the prices of the stock increased to $ 204 per share. It can be observed that the prices of the shares increased by $181 per share during the holding period of Mr. X which makes to nearly 786% return in just 6 years. This is the strategy of the buy and holds which worked very well in case of the purchase of stock of Facebook by Mr. X thereby giving him the excellent results.
Advantages of Buy and Hold
Different advantages of the buy and hold are as follows:
- There are some valuable tax benefits in case of the buy and hold because the investor can defer the capital gains taxes arising on the long term investments made by holding it rather than by selling.
- It reduces the costs of the investors as stocks which are purchased gets sold only when the investor requires the money and not on frequent basis thereby the brokerage commissions that are to be paid by the investor is minimized.
- The strategy is less stressful as there is an only a one-time selection of stock and investor after that is not concerned about each and every movement in the prices. This makes it easier for the trader to follow its trading plan and stay with it.
Disadvantages of Buy and Hold
Apart from the advantages, there are some limitations and drawbacks as well of the buy and hold strategy which includes the following:
- Using the buy and hold investor holds the underlying asset for a longer period. During the holding period there are several fluctuations in the market and by holding for a longer time investors forsake the gains which they can earn by riding out the volatility rather than gains locking.
- High-risk tolerance level is required for the buy and holds because there are several fluctuations in the market and over the holding period of the investors there can be multiple fluctuations either positive or negative. So, for going with the buy and hold investors should have the ability to overcome the behavioral biases and the impact of fluctuations. It requires high patience to follow the strategy of buy and hold properly.
- As per the strategy of buy and hold, the investor should not watch the short term fluctuations and news in the market and avoid them for holding the position for the long term period. This increases the risk of unlimited losses if any negative event happens, either company-specific or market-specific. In that case, a person might have to lose all his hard-earned money which he invested.
Important Points of Buy and Hold
- It is the strategy of the investment where the investors buy the security and hold it for a longer period of time regardless of the fluctuations of short term nature that occurs in the market.
- Apart from the stocks and bonds, a strategy of buy and hold apply to the real estate sector as well. in such cases, investors buy houses without flipping them.
- There are some valuable tax benefits in case of the buy and hold because an investor can defer the capital gains taxes arising on the long term investments made by holding it for the longer period as desired rather than by selling it.
- According to the critics, in case of a strategy of buy and hold, investors forsake the gains which they can earn by riding out the volatility.
It is the long term passive investment strategy where the investors hold the purchased stocks or bonds for a longer period of time regardless of a change in the market conditions. Investors invest in the stock of the companies after considering the fundamental analysis of the company and they see the stocks as the investment and do not give the focus of timing each of the moves in the market. The strategy is easy to follow and is less stressful as there is an only a one-time selection of stock and investor after that is not concerned about each and every movement in the prices. The strategy of buy and hold have been praised by many legendary investors like Warren Buffett who says that the strategy is an ideal strategy for the individuals who wants healthy long term returns.
This has been a guide to what is Buy and Hold and its definition. Here we discuss real-world example of buy and hold strategy along with its advantages, and disadvantages. You can learn more about accounting from following articles –