In our last article we looked into what shares or stocks are. In this article we will try to understand what you do with the shares once you have bought them; do you sell them immediately there is a price increase or do you hold them for several years before selling them at a margin?
The decision on whether to hold a share for a given number of years, or to sell it immediately you record a significant increase in its price, is more of a personal issue. Different people invest with different motives. The time each investor wants their money back plus the returns on investment differ from one investor to another.
First there is the investor interested in annual regular income and capital gains in the long run. For such an investor, they take their time when analyzing the potential companies to invest in. They dwell more on the fundamentals of the companies and they only invest in companies with strong fundamentals. This means companies that have high growth prospects and have a stable and consistent dividend payout. That way, they are assured of their annual regular dividend incomes and also a high capital gain reward after their long wait for the share price appreciation.
On the other hand, we have share traders who are interested in quick gains in the value of their shares. They have no interest whatsoever in the dividends of the companies in which they buy shares except when those dividends affect the share price. For this category, their prime interest is to know the trend of the price of a given share in the short term, speculate its value in the near future, and then decide whether to buy it or not. These are also known as technicians.
From the two major categories above, you can choose to either be a technician or a long term investor once you`ve bought shares in a company. It all depends on when you need your money back.
For short term investors, they mostly employ the services of stock brokers who monitor the stocks trends in real time and then trade on behalf of their clients. For long term investors, they may require the services of a financial analyst who helps them select the best company that suits their investment needs. From there on, they may not need any frequent intervention of the financial analyst since they won’t be trading their shares at the bourse until the end of their investment period.
Despite the above two categories, any wise investor should have a mixture of both for diversification and risk reduction. The recommended ratio of long term to short term investments in your portfolio is usually about 7:3. That however is subject to the different risk orientation of the investors.