A holding period is the amount of time the investment is held by an investor or the period between the purchase and sale of a security. The holding period is calculated starting on the day after the security’s acquisition and continuing until the day of its disposal or sale
If you have a stock in your portfolio that’s currently going up or even losing faster than you expect, it’s normal for you to ask this question, how long should I hold this stock?.
I think this is the next popular question that often comes after “which Nigeria stocks should I buy now?”,
As simple and straightforward as these questions are, they actually determine your success rate in the stock market. If you don’t know what to buy, you may end up owning the wrong stocks and if you buy shares of bad companies, you will definitely lose money to sellers.
Conversely, if you buy the right stock, and see your profit grow, what happens? you’d wonder when is the time to sell for maximum profit because it might be the paper profit that could be wiped out once profit takers step in. And if the price dips, the same question remains sticky, should I sell now or wait for a bounce?
I am just laughing while typing this text because Mr market is very tricky!
Back to the question, how long should I hold my stock before selling?
While there are no perfect answers to this, I’d like to share my personal experience and what I do.
The first question gives you the right answer.
Did you buy the stock for trading or investment? Some stocks are good for trading because their prices go up or down significantly within the short term but the downside side is that, they don’t pay dividends while others are stable, they paid dividends and are great for long term investment.
When you buy a stock for trading, you are indirectly saying, I want to make money from capital appreciation, so why sit on it for long? It’s only GREED that will make one hold on to a stock that’s already up significantly. The guys that have been with me in this trading journey know that once my stocks are in the green territory, say 15%, 20%, or a maximum of 30%, I always sell a significant portion to preserve capital and lock in profit. We call it discipline!
Yes! the stock may go up and even appreciate by 100% but you know what? I achieve steady growth by compounding returns multiple times.
15% return compounded 3x equals 52% – when you buy a stock and sell for 15%, re-invest both the profit and capital in another stock that appreciates by 15%, rinse and repeat these processes multiple times in a year, my brothers and sisters (LOL), you should net an average of 52% in a year.
This is what trading stocks can do for you but that doesn’t mean it comes so easy every week or month. You don’t even need to be a frequent trader to achieve this impressive feat, just buy a collection of great stocks, that’s all.
Why 15%, 20%, or even 30% and not 100%?
I think they are not only modest and realistic but easy to come by in the stock market. The rates on FGN bond and Treasury -11% and 9% per annum respectively – are far lower than compound returns of 15%.
And if you follow my blog regularly, you’d notice that some of my top picks in the past have generated these lower double-digit returns repeatedly.
How long should I hold a stock?
As a beginning or existing trader who is yet to master the single factor that drives stock prices, know this right now – EMOTIONS is the major influencer of stock prices.
My definition of emotion is what you feel about a company’s stock which is a result of present financials, stock prices, and ultimately market news – government policies, or trends, or economic indicators. If you put all these together, they will most likely form a decision in your mind, which could be BUY or SELL THE COMPANY.
When it results in a buy decision, we say you are greedy and if it makes you sell, then you are fearful – this is the summary of emotional trading.
Let’s say you just read breaking news that the federal government is not only giving all sugar manufacturers in Nigeria a 10-year tax break but making N500 billion intervention fund available at 0% interest for 5 years. They also have off-taker who is ready to buy all their sugar produce, package and make them ready for export, what do you think will be investors reaction to Dangote Sugar? I bet you the rally will be massive.
Let’s also say that Okomu Oil had just released its financials with revenue growing by 50%, and profit after tax hitting an all-time high, up by 250%. The result was largely driven by CBN FX restrictions on Palm oil, what do you think investor’s reaction on Okomu oil stock would be? It will blow up.
Despite the different scenarios painted above, both companies are well-positioned to benefit and generate good returns ahead of their next financials.
Have they released their result, NO! but their share prices are set to skyrocket in coming weeks or months, this is how stock appreciates when investors’ perception, sentiments, or emotions towards a company is positive?
What has this got to do with the holding period of a stock?
Understanding the practical example of how stock prices are largely influenced by emotion will help you cut through the market noise, ignore fluctuations on a daily basis and focus on the overall fundamentals of a company. And by my intuition, I think 3 months should be the minimum holding period to ride a stock because it coincides with the period companies are expected to release their quarterly results.
Quarterly result is the most important financials you need to become a short term trader. It reflects the position of a company and how management decisions s been affected by current economic events and sectoral policies. And if it turns out well, the sales, profit, and cash flow will tell you which should ultimately attract positive or negative sentiments.
So it’s safe to conclude that anyone that is not ready to hold a stock for at least 3 months to allow the real fundamentals of a company – quarterly result – influence its stock price may be gambling or speculating. This type of trader is only betting on fast moves which are risky.
But does that mean I must hold my stock for 3 months? Capital NO, if your stock prices go up by more than 15%, 20%, or even 30% before the end of 3 months, this is perfect, at least you were patient enough to cut through the market noise.
The real truth is this, most of your stocks will most likely exceed 15% in the next 3 months if you do your homework.
So when next you buy your next stock, resolve to hold the stock for at least 3 months as this will help you cut through market noise (daily fluctuations) while