Why it makes sense to invest in shares on a long term basis

Vikas Singhania Trade Smart Online The most important thing for a retail investor to know when he decides to put money in the market is whether he is an investor or a trader. Irrespective of the type there is no denying the fact that money making in financial markets is a time consuming game. One cannot rely on market tips and friendly advises as their success rate is not worth writing about. No matter how many trading schemes and packages are available in the market, one that fits your personality will only work for you. It is important to realise early in the game the time frame that suits you. There are two types of investors – a) short-term and b) long term. Short-term investors invest for a small period of less than a day to two-three months while long-term investors look for a time frame from two months to years ranging anywhere.Short-term time frames would require more attention to the stock prices. For a person who is employed, it would very difficult to keep a track of his portfolio on a regular basis. Apart from the distraction, short term trading requires a different set of skill set. Knowledge of technical analysis, market pulse and willingness to take losses early are normally the traits of a good short term trader. His strategy includes manoeuvring between the opening and closing prices and knowing the precise moment to enter or exit a position. This requires him to be in front of the screen or even if he is not he should be able to pay equal attention to the market and his job. Furthermore, this has to be done regularly over a long period of time for capital to build up. Short term investment gives a higher return for the higher risk borne.Compare this to a long term investor. The one characteristic that is most important for a long term investor is patience. With patience and basic knowledge of finance, chance for an investor to make money is higher than blindly getting in and out of stocks on a daily basis. Basic strategies like investing in good quality IPOs and in shares of listed companies with good prospects for the future will go a long way in building a good long term portfolio. If the company management is good and the sector has a bright future the company will perform in the long term. Short term there can be blips but in the long run such investments have given good returns. Long term investments carry a lower risk and so are comparatively safer to invest. If the portfolio is carefully chosen long term investments yield very high returns. An investment in even stock market index would have given a compounded growth rate of 18 per cent since its inception in 1979. But the key is to stick to your investment, believe in the company and its management. The problem for short term investor is they want to earn 18 per cent in a month and jump from one stock to another in the hope of catching a big move. Long term investing is more of investing in a business. You buy the stock with the philosophy that you own that business. One does not move between businesses very frequently. But the problem of investing for a long term basis is to have the ability of identifying a good company and a good management from a bad one. Good businesses have been destroyed by bad management. For a retail investor developing this ability is a time consuming process. Further the difference between price and value needs to be clear. Like Warren Buffet says it is far better to buy a wonderful company at a fair price than buy a fair company at a wonderful price. Having the knowledge of what is the right price to buy is important for success. The added advantage for long term investment is that the investment will have no tax incidence on it.