DID YOU KNOW

Holding = Buying

In our Do or Did You Know? blogs we provide readers with useful information that is generally not widely realized by inexperienced investors. In this edition we will dive deeper into the strategy of holding an investment or trade in your portfolio. In Chapters 1,5 and 6 of our publication, When to Buy and When to Sell: Combining Easy Indicators, Charts, and Financial Astrology (available on Amazon), we introduce investment strategies, styles, and risk management. 

     These strategies and processes are mainly based on personal preference and/or the risk tolerance of the investor or trader.  

      For a long-term investor, who is not active in the choices regarding their stock or asset positions, “holding” is essentially the only strategy they employ, and often do not pay too much attention to the short-term market gyrations. This is usually true for those with company 401K’s, pensions, and real estate investments. Although they are always vulnerable to the whim of the market news and market makers, the S&P 500 and Nasdaq tend to increase over time, and so long as one is not planning to retire right before a crash, they are fairly secure with their overall investments. These individuals also do not control any of their positions, and have their money periodically invested, usually quarterly, by their fund manager. 

      Those who are active in their portfolio choices, from longer-term down to day-trader, are making frequent decisions on whether to buy, hold, or sell. These decisions may come on a quarterly, weekly, daily, or even minute-by-minute basis. “Active” investors/traders, however, are making many more decisions than they might realize.  

      Every time a position is opened or closed, whether a stock or option, an investor is making a decision to buy, sell, or leverage, a stock or option contract. Concentrating on buys, they occur when one purchases an underlying stock, or opens a Call or Put option, depending on whether they expect the stock to rise (Call) or fall (Put). Once the position is open, the decision on when to sell is of utmost importance, especially for short-term or day-traders looking for income. 

      No matter what strategy or rules one employs, there is a level, percentage, chart pattern, risk tolerance, or indicator, that one uses to “manage” the trade. Managing the trade is just another way of saying that there is a daily (sometimes intra-day), decision-making process to consistently consider whether to “hold” the position open or close it out.   

      Therefore, it is our contention that holding is a decision that an investor, and especially a trader, makes every day, or minute, that they do not close the position. Since news, insider buying/selling, overnight profit taking, and global trading can affect the stock or option price at any moment (as markets are essentially tradeable 24/7), any position is at risk at ALL TIMES. Some are higher risk than others, of course, but basically all have some vulnerability.  

      Under the premise that one is holding at the current price due to their belief that it will continue in the same price direction, the decision is equivalent to buying. Since commissions are free for stocks and less than $1 for each option, it can be argued that keeping the position open, especially overnight, is equal to buying the stock over and over. Whether you believe the equity is undervalued, overvalued, or primed to reverse, stocks are a zero-sum game, meaning it is worth exactly what the price states at any given point in time (also discussed in our publication). So, if you are holding, you are essentially maintaining the buy mentality.  

      The only difference between holding and buying, therefore, is the tax factor depending on the length of the trade. Day-traders generally do not concern themselves with the taxes, as the trades are considered their income (or job). When assessing a stock or equity, this is a very helpful way to decide when to close a position, especially if you are not concerned with the tax ramification. Ask yourself often – Would I buy this stock right now?  

*** This information is not intended to be financial advice, and should be considered or any specific buy or sell recommendation, but rather a guide to assist the reader in some further understanding of the financial markets.