Advantages & Disadvantages of Holding Common Stock

Original post by Geri Terzo of Demand Media

Common stocks are the most widely traded equity securities. The three primary options that investors have are to buy, sell or hold. These activities are often performed based an investor's desired return and ability to handle risk. Holding onto common shares can lead to income that in some cases is sustainable for generations. Conversely, by holding onto shares for extended periods of time, investors could be forced to wait years to enjoy gains, lose out on profits or be forced to accept a loss.

Positioning

Investors who decide to hold common stock could reap some benefits that other investors miss during a market downturn. The stock market plummeted 60 percent from its best point in 2007 to its worst levels of 2009, according to a 2011 article in "USA Today." Investors who opted to hold stocks continued to earn about 2 percent in dividend yields each year while others were only facing losses. Subsequently, longer-term investors were better positioned when recovery was underway in the financial markets.

Returns

Investors could be in for a long wait if they are intent on holding common stock for the best profits, according to hedge fund manager Jonathan Hoenig, commenting on the Smart Money website. Although holding stocks can lead to eventual returns, the market values of the stocks owned are likely to increase steadily but slowly. While it may not always be possible to earn blockbuster profits by selling stocks more quickly, the payoff for holding stocks is questionable. The average 12-percent return in the stock market that may entice investors is dependent on owning stocks for more than seven decades, according to Hoenig.

Timing

Investors who hold onto winning stocks from early on may eventually be rewarded with sizable returns. Some of the most successful companies in the world, including technology leader Microsoft, had a small beginning. Microsoft began trading in the stock market in 1986 for $21 per share, according to "The New York Times." In July 1999, the stock price soared to about $100 per share, which made many investors rich. By 2011, the stock price had retreated.

Consideration

Emotions, both positive and negative, are a large driver of investor activity. In a down market, it can be challenging to hold onto stocks when the prices are giving all the indications to sell before conditions worsen. Investment manager Neil Hennessy removes the chance for emotional investing by adhering to strict guidelines, according to the CNN Money website. Hennessy only re-balances, or makes changes, to an investment portfolio once per year. Also, he uses a quantitative approach to identify stock prices that appear to be undervalued but growing.

Resources

• MarketWatch; Market Efforts Color Microsoft's Windows 8; Dan Gallagher; September 2011
• "The New York Times"; Gates Hits $100 Billion Mark, More Or Less; Amy Harmon; July 1999

References

• SmartMoney; The Popular Misconception; Jonathan Hoenig; February 2001
• "USA Today"; How Does A Buy-And-Hold Investor Know When It's Time To Sell; Matt Krantz; February 2011
• "The New York Times"; The Facebook-Microsoft Parallels; Peter Lattman; January 2011
• CNN Money; Stocks -- Know When To Hold Em'; Eeugenia Levenson; February 2009

About the Author

Geri Terzo is a business writer with over 15 years experience reporting on Wall Street. Her coverage ranges from institutional investing, including hedge funds and investment banking, to family topics and her career experience includes work for Fox Business, CNBC and "IDD Magazine." Terzo is a graduate of Campbell University, where she earned a B.A. in mass communication.