Stocks have a number of advantages relative to other forms of investing, including a higher long-term rate of return. Additionally, holding stocks for an extended period has benefits as an investment strategy relative to short-term stock trading strategies.
Stocks vs. Other Products
Relative to other investments, such as bonds, certificates of deposit and real estate, stocks historically have a high rate of return. New York University compiled data from 1928 to 2014 showing an 11.53 percent annual rate of return for stocks in the Standard & Poor index. This rate compared favorably to a 3.53 percent annualized return in Treasury Bills and a 5.28 percent return in Treasury Bonds.
Liquidity is another benefit of stocks relative to other comparable forms of investment. You generally can trade and sell shares and finalize settlement within three days. In contrast, buying and selling real estate takes weeks or months. A CD requires that you hold the product for months or years to achieve the modest interest yield. Bonds similarly require an extended holding time to reach maturity.
Holding Stocks vs. Trading
Recognize the difference between holding stocks and trading stocks as an investment approach. Holding stocks means you buy shares as a long-term investment. Trading usually means buying and looking for a quick sale on share-price appreciation.
Relative to trading, holding stocks offers the following benefits:
Higher returns - USA Today noted that historically, holding stocks for longer periods of time leads to higher annual return rates. Because of the fluctuation of the stock market over time, investors typically earn higher returns on 20-year holds versus 5 or 10-year holds.
Dividend income - Holding stocks also allows you the potential to earn dividend income in the form of cash or stock allocations. This passive income enhances your investment return over time. In contrast, a trader or short-term investor looks to cash out quickly on a boost in share price. Fast trades mitigate opportunities to collect dividends.