Fundamental analysis doesn't require you to constantly buy and sell stocks. In fact, many investors tend to do their homework, buy a stock, and hold on. They realize that constantly buying and selling stocks can be hazardous for your portfolio because it may hurt you with:
- Mounting trading costs: Every time you buy or sell a stock, it costs you something. Certainly, you can reduce commissions by opening an account with a deep-discount online brokerage. But the costs are still a factor, including ones you might not notice.
There are two prices for stocks, the bid price and the ask price. The ask is the price you must pay when you buy a stock. The bid is the price you get when you sell. The ask is always higher than the bid, just like the price you get for trading in a car to a dealer, the bid, is less than the price the dealer will resell the car for, or the ask. When you buy a stock, you're paying a hidden fee, which is the difference between the bid and ask, or the spread.
- Unnecessary taxes: Flipping in and out of stocks can end up making Uncle Sam rich. If you sell a stock for a profit before you've owned it at least a year, it's a short-term capital gain. Short-term capital gains are taxed at your ordinary income-tax rates, which can be up to 39.6 percent. On the other hand, if you hold onto a stock for more than a year and sell it, the highest tax rate you'll likely pay is 15 percent. By just holding on a little longer, you can save a bundle on taxes.
- Mistakes: It's tempting to think that you're never wrong. And after reading this book and applying fundamental analysis, you'll be more informed than many other investors. Still, it's easy to make a mistake if you sell too early.