While investing in the financial markets, traders use a lot of tricks and strategies to make their investments profitable. These could be expert used, individual Strategies, or a combination of strategies. Traders keep looking for new opportunities and strategies in the markets.
The article discusses one of the most used investment strategies, the buy and hold strategy. It is used by the traders to buy securities for a long period of time and has no short-term selling intentions. They have to be emotionally strong as they have to ignore the ups and downs of the market for using such strategies.
Let’s quickly drive in and know the trading strategy better for use and results from the investments.
Buy and Hold Strategy
The buy and hold strategy is called the position trading strategy, which is mostly used by stock market investors. However, other market traders can use it if required. The Strategy helps traders invest in the financial assets of the market for a long period of time. The aim of the Strategy is to have the price of the assets appreciated despite the high market volatility.
The Strategy is for the confident and patient traders who believe that their asset price will grow higher in future and therefore are ready to compromise the small market changes. However, the risks of the market should be checked prior to knowledge of the trader and how they can manage it.
For trading with such a strategy, investors have to first analyze the market, trading instruments, market factors, use various tools that guide them for a confident trade, and most significant trading with a broker that supports the best services. All these are essential for a successful trading experience and making the trade fruitful.
The trade is long-termed, and traders cannot sell their assets with small market shifts or changes. Hence, not involved in the market trimming or calendar effects. They buy and sell as per their Strategy and try to make the most out of their investments.
The positioning strategy is said to be an example of passive investing that is recommended by several renowned traders as in long-term trade; the assets have a correlation with the market changes and economic growth impacting the trade.
How to Apply a Buy and Hold Strategy?
The buy and hold strategy is famous among stock market investors. They use it for analyzing the market, its impact, and for making informed decisions. A stock market is a volatile place that is operated through exchanges. A trader invests in these stocks and then waits for market opportunities to earn.
But the question is how to apply it in trading? So, for that, traders have to first analyze the stock market in detail, do research, study the market, and decide the instrument they would be trading. They check the index, for example, the Sensex, to know the barometer of the stock market performance.
The market has a number of good stocks that could be invested by the traders. The stocks with indices are well performed, financially sound, and the companies have an excellent market reputation. Once the trader has gone through all the stocks available and chooses the one that would be profitable for future trading and has ample advantages.
Then traders would use the buy and hold strategy; they will buy and hold the stocks/indices for a long period for making high profits, which makes it a passive investment, based on the premise that the stock market will be efficient and offers good market returns. Traders can buy the stocks and hold them till the time they want.
How to use the Buy and Hold Strategy?
The buy and hold strategy is simple to use. Traders can access it by opening a brokerage account or a trading account with a stock exchange. The steps for using the Strategy for a profitable investment begin with opening a trading account. Below mentioned are the steps of how traders can use the buy and hold strategy with an example of PrimeFin broker:
- The first step is to visit the website of the broker and check with the services, instruments, regulations and advanced tools offered. This will help traders decide the best broker they can trade with.
- The second step is to click on the open an account option with PrimeFin traders can even access the demo account to practice investment before going live. To open a live account, traders need to get registered with the broker; they have to fill in the form requiring name, email address, contact number, country code and a password.
- Next, traders have a new page where they fill in other information relating to their income source, documents, license etc.
- The fourth step is to answer the questionnaire relating to prior trade knowledge, if any. This will help the broker suggest the best services to the trader.
- The following step is uploading the documents on the broker’s website for verification. This is done to provide a secure trading environment and make the best trading experience possible for the clients.
- Once the process is done, traders can select the trading account they want to trade with and find suitable for their investments.
- The last step for opening an account is depositing the funds, as this will initiate the investment process. Traders can then invest their funds in the market, here stocks we take, for instance, that trader purchased.
- After that trader will use the trading tools, platforms, technical and fundamental analysis
- to examine the market and future prospects. Thus, having a strategy applied through the trading tool for a better investment. Hence, with the trading platforms, traders can apply the buy and hold and even other strategies for trading stocks.
- With such investments, traders have to regularly monitor the market and the movements taking place to have an idea of the market and the instrument.
Performance of Buy and Hold Strategy
The buy and hold strategy has been considered as the best in the stock market to trade for the long term or other markets as well. If we analyze the performance of the Strategy in the markets, it has given the results that traders have thought of. Near or where it has managed to satisfy the needs of the traders investing and using the Strategy.
To get an overview of the Strategy, let’s take an example; Ms. Green has an amount of $2,00,000 that she wants to invest in various sectors of the market and diversify her portfolio. So, it has better investments. She decides to analyze the market on different criteria and then trade.
Once the market conditions are studied, she can make her investment. Based on this, she invests $1,00,000 in stocks in bonds and shares. When she analyzed the market after a year, there was a sharp rise in the value of investment made.
Here, she has to decide whether she wants to keep the same ratio of her investment that is 50% in bonds and 50% in stocks, or change it to have higher profits. For this, the trader may sell some stock as the stock prices have increased. If she wants to keep it the way it is, she’ll have more money in stocks.
She has to keep the stock and bonds for a long period; then, she can go with the buy and hold strategy. If not, she can skip the Strategy and make the changes in her investments as per her needs.
With this, we can know that if a trader makes no change to the investment keeping the portfolio the same hence, no rebalancing, they can continue with the Strategy. But, when they make a change, they have to switch with the Strategy as well.
The performance of the buy and hold strategy has given positive results for the traders. With the example, we can understand how traders can apply it in their long-term goals and make the best trade. The strategy has a great impact on the stock market and indices, making it a good strategy for market traders.
Instruments used along with Buy and Hold Strategy
The index funds, stock market, and exchange-traded funds(ETFs) are the three financial instruments that best go with the buy and hold strategy. Moreover, the index funds and ETFs have the exact composition of the index funds they follow and could be used for trading.
Index funds are funds that track the execution of the underlying index. The investors can buy the index funds that are a set of securities representing the market, such as stocks or forex etc. Traders can buy and redeem the index funds of a company. The expense ratio of the funds is lower than the funds which are actively managed in the market.
ETFs are the basket of stocks that are listed with the stock exchange and traded. Traders can buy and sell the ETF during the market trading hours. Traders can invest in them for advantageous investments in the long run. ETFs are the best for a good investment as they have liquidity.
Advantages of Buy and Hold Strategy
Traders can have the following advantages with the buy and hold Strategy:
- The transactions are low with the buy and hold strategy; hence the commission, trading costs, brokerage fees etc., are also low.
- The trade with buy and hold strategy is for the long term, and gains are higher. With this, traders will have a low tax on their gains due to longevity. Thus, it is beneficial for the traders.
- The Strategy is simple and easy to use. Traders can apply for one and wait for the correct time to make changes.
- Traders of the Strategy have free time and do not require to regularly monitor their trade.
Disadvantages of Buy and Hold Strategy
The Strategy is profitable in the long run but still has some flaws, which traders should know for a successful trade. Below are the disadvantages of the buy and hold strategy:
- The Strategy requires suppression of behavioral bias and their emotional turmoils.
- High risk tolerance will make traders achieve their desired results which are difficult for most traders.
- It is easy to implement but difficult to follow Strategy; thus, traders have to be patient while trading in such a strategy.
- The Strategy is long termed, and traders have to ignore the market fluctuations. These price movements could be small or large; hence, no limit is fixed for loss in the market due to an uncertain change or negative event.
- The trade is impacted by news and other financial factors which are uncertain, and traders can have losses with such long term investments.
The financial market is huge, and investors can select any market to trade or invest their funds in. They take strategies and plans of the trade seriously, which are decided with good market research and analysis. The article has taken account of the buy and hold strategy. A long-term strategy that is highly beneficial for index, stock, and ETF traders.
For investing with the Strategy, traders have to keep certain points in mind:
- Traders should consider the market fluctuations of price and news on the markets. As this will help them avoid the unnecessary loss in the investment.
- The Strategy could be used with other markets and does not confine to the stock market.
- The broker for investment should be selected with full knowledge and should be regulated.
The buy and hold is a long-term strategy good for investors who want diversification in their portfolios. Traders can make profits from their investments in the long run and enjoy trading. However, they should watch the market in intervals of times set for better knowledge and understanding of the market and its changes.