Making Money By Holding Stocks: The Power of Long-Term Investing

Ever wondered if you can actually make money just by holding onto stocks? Well, I’ve been investing for years now, and I can tell you that holding stocks long-term isn’t just a viable strategy—it’s often the most reliable way to build wealth in the stock market

Many beginners think successful investing means constantly buying and selling stocks to catch every market swing. In reality, the opposite approach typically works better. Let me break down exactly how you can make money by simply holding stocks, and why patience might be your greatest investing virtue.

How You Make Money By Holding Stocks

When you hold stocks for extended periods, you can generate returns in two main ways:

1. Capital appreciation – The stock price increases over time
2. Dividend payments – Regular cash distributions from company profits

Let’s dive deeper into both these methods and explore why the “buy and hold” approach tends to outperform active trading strategies

Capital Appreciation: Watching Your Stocks Grow

The primary way investors make money through holding stocks is simple buy shares at one price, hold them as they increase in value and eventually sell them at a higher price. This difference between your purchase price and selling price represents your capital gain.

Looking at historical data, the S&P 500 has delivered an impressive geometric average return of 9.80% per year between 1928 and 2023. This significantly outperforms other asset classes like:

• Three-month Treasury bills (3.30%)
• 10-year Treasury notes (4.86%)
• Gold (6.55%)

What’s remarkable is that the S&P 500 experienced annual losses in only 13 years between 1974 and 2024. That means the market generated positive returns much more often than not!

Dividend Income: Getting Paid While You Wait

Many established companies distribute a portion of their profits to shareholders in the form of dividends. These payments typically come quarterly and represent a direct cash return on your investment.

When you hold dividend-paying stocks, you create a passive income stream without selling your shares. Even better, many investors use dividend reinvestment programs (DRIPs) to automatically purchase additional shares, accelerating their wealth-building through the power of compounding.

Blue chip companies and defensive stocks (those that perform well regardless of economic conditions) often have the most reliable dividend payment histories.

6 Key Benefits of Holding Stocks Long-Term

1. Better Long-Term Returns

History clearly shows that stocks outperform virtually all other asset classes over the long run. As mentioned earlier, the S&P 500’s nearly 10% annual return over almost a century is remarkable.

Different stock categories offer varying return potentials:

• Emerging markets have some of the highest return potential but also the highest risk
• Small and large-cap stocks generally deliver above-average returns with higher volatility
• Index funds offer broad market exposure with relatively lower risk

2. You Ride Out Market Volatility

One of the biggest advantages of long-term investing is that it allows you to endure market fluctuations. It’s not unusual for stocks to drop 10-20% (or more) in shorter timeframes. However, these temporary downswings rarely matter over decades.

Looking back at stock market history since the 1920s, investors have almost never lost money in the S&P 500 over any 20-year period. This holds true even when accounting for major setbacks like:

• The Great Depression
• Black Monday
• The tech bubble burst
• The 2008 financial crisis

In each case, patient investors who stayed the course were rewarded.

3. Less Emotional Decision-Making

We humans are emotional creatures, and this often hurts our investment performance. Studies consistently show that the average investor significantly underperforms the market due to emotional decision-making.

According to Dalbar’s Quantitative Analysis of Investor Behavior study, while the S&P 500 delivered an average annualized return of 9.65% during the 30-year period ending December 31, 2022, the average equity fund investor earned only about 6.81%.

Why such a gap? Two major psychological factors:

• Fear of regret: Investors panic-sell during downturns to avoid further losses
• Short-term pessimism: People become excessively negative during market corrections

By committing to a long-term holding strategy, you’re less likely to make these costly emotional errors.

4. Lower Capital Gains Tax Rate

Here’s a benefit many overlook: favorable tax treatment. When you sell a stock you’ve held for less than a year, any profit is taxed as ordinary income—which could be as high as 37% depending on your tax bracket.

But when you sell stocks held for more than a year, you qualify for the long-term capital gains rate, which maxes out at just 20%. Investors in lower tax brackets might even qualify for a 0% long-term capital gains rate!

This tax advantage alone can significantly boost your after-tax returns.

5. More Cost-Effective

Trading frequently incurs various costs that eat into your returns:

• Transaction fees: While many brokerages now offer commission-free trading, there can still be other costs involved
• Bid-ask spreads: The difference between buying and selling prices adds up with frequent trading
• Account maintenance fees: Regular traders often pay more in various account fees
• Higher taxes: As mentioned above, short-term trading leads to higher tax rates

Even with “free” trades, active traders still lose money through tax inefficiency and time spent managing positions.

6. The Magic of Compounding

Perhaps the most powerful benefit of long-term stock holding is compound growth—especially with dividend-paying stocks.

When you reinvest dividends instead of taking them as cash, those dividends purchase additional shares, which then generate more dividends. This creates a snowball effect that accelerates your wealth building over time.

For example, $10,000 invested in dividend-paying stocks with a 3% yield and 6% annual price appreciation would grow to about $32,170 after 10 years with dividends reinvested—compared to just $29,440 if you took the dividends as cash.

Best Types of Stocks for Long-Term Holding

Not all stocks are created equal when it comes to long-term holding. Here are some categories that tend to work well:

Index Funds

These ETFs track specific market indexes like the S&P 500 or Russell 1000 and offer instant diversification at low cost. They’re an excellent core holding for most investors.

Dividend-Paying Stocks

Companies with a history of steady and growing dividend payments can provide both income and growth. Look for businesses with:

• Strong competitive positions
• Consistent cash flows
• Reasonable payout ratios
• History of dividend increases

Growth Stocks

These are companies generating significantly higher revenue at faster rates than others. While they come with higher volatility, quality growth companies can deliver exceptional long-term returns.

Common Questions About Making Money Through Holding Stocks

How long should I hold stocks to maximize returns?

While the minimum holding period for long-term capital gains tax treatment is just over 12 months, truly maximizing returns typically requires holding quality stocks for many years or even decades. The longer your time horizon, the more likely you are to achieve positive returns.

Can I sell a stock right after buying it?

Technically, yes, but there are considerations:

• Some brokers have minimum holding periods
• Frequent traders may be classified as “pattern day traders” with special account requirements
• Short-term trades incur higher tax rates
• Transaction costs can eat into profits

What if I need the money sooner?

This highlights the importance of proper asset allocation. Money you might need within the next 3-5 years generally shouldn’t be invested in stocks. Create a balanced portfolio with some more liquid, less volatile assets for shorter-term needs.

My Personal Experience With Long-Term Investing

I’ll be honest—sticking with a long-term strategy hasn’t always been easy. During the March 2020 COVID crash, watching my portfolio drop 30% in a matter of weeks tested my resolve. But I reminded myself that these emotions are exactly what cause most investors to underperform.

Instead of selling, I actually added to my positions during that downturn. Those purchases have since become some of my best-performing investments as the market recovered and continued upward.

The hardest part of investing isn’t finding great stocks—it’s having the discipline to hold them through volatility. As legendary investor Warren Buffett says, “The stock market is a device for transferring money from the impatient to the patient.”

Final Thoughts: Yes, You Definitely Make Money By Holding Stocks

The evidence overwhelmingly supports that holding quality stocks for long periods is one of the most reliable ways to build wealth. While it lacks the excitement of day trading or the perceived safety of keeping money in a savings account, long-term stock investing has proven itself time and again.

By understanding how you make money through capital appreciation and dividends, taking advantage of tax benefits, avoiding emotional trading mistakes, and harnessing the power of compounding, you position yourself for financial success.

Remember that investing is a marathon, not a sprint. The real money in the stock market is made not by jumping in and out of positions, but by carefully selecting quality companies or index funds and allowing them the time to grow your wealth.

What’s your experience with holding stocks long-term? Have questions about building a portfolio for the long haul? Share your thoughts in the comments!