The allure of buying and selling stocks frequently can be difficult to resist, but the temptation may be costing you more than you think if you indulge yourself. Over the long term, investing in the stock market has proven to be a very successful strategy. Unfortunately many people lack the discipline of long term investing and continually look for the quick short term gain. It is very difficult to achieve short term results with an instrument designed to accumulate wealth over time. It is not impossible to achieve short term results by day trading, but more people fail at it than succeed. Furthermore, even if you do “beat the market” you still have to overcome three more obstacles to achieve lasting success.
The first obstacle for short term traders is taxes. Every time you sell a stock you are subject to taxes on the gain of that sale. When investing for the long term, portfolio turnover is much less. Therefore, you are exposed to fewer tax liabilities while you continue to grow your portfolio. The ultimate long term investor, Warren Buffet, believes in buying good companies and holding them forever, or at least until something fundamentally changes the strength of the company. When considering to sell a stock you own, you need to factor in the effect taxes will have. Long term investment strategies delay tax liabilities allowing your money to continue to grow and compound for you.
The second obstacle to battle when trading frequently is commissions. Obviously, the more trades you make the more money you are paying in commissions. While online discount brokers have reduced the cost per trade, over time, frequent trades can still eat up a significant portion of your portfolio. Once again, if you are taking a long term investment approach you are reducing the overall commission expense to a negligible amount.
The third potential setback to short term trading is a big losing trade. Unless you are very disciplined and diligent about your stop losses, you will eventually have a significant loss when trading. When that happens you can do one of two things: Sell the stock, losing valuable working capital or wait, hoping the stock will go back up. Day traders are not concerned about the fundamentals of a company so a losing stock position is less likely to go back up without strong fundamentals to support it. Either choice, selling at a loss or waiting for a price rebound, can be very costly for a short term trader, both financially and emotionally. However, if your investing for the long haul you are looking for solid companies that will increase in value over time. Short term price drops can be a chance to add to your position rather than a setback. If used correctly, the stock market and time are wonderfully allies when trying to accumulate wealth.