There are a lot of investors in the stock market today who are drawn to the idea of instant profits. While that is great in the short term, building wealth is more like a long-term run than a quick jog. Long term investing is designed to take advantage of price appreciation over an extended period of time, typically several years. But what is a long term share with such great returns? How do you choose the best stock to buy for the long term?
When finding the best stocks to hold for the long term, there are important changes in perception to take into account. You need to change your mindset with the stock and become a co-owner of a business, not simply gambling on a price change. This guide will show you the steps to finding the best long term stock investments that will pay off.
How to Choose Best Long Term Stocks?
Selecting the right stocks is an essential step in reaching your financial goals. There is no guaranteed way to predict the future, but the reward can outweigh the risks when there is a systematic way to analyze companies. It is important to recognize that you are investing in companies with solid fundamentals and a sustainable business future.
If you are new to all of this, you should first understand how the equity market works. For an overview of how it works, and its different types and benefits, check out our blog: Equity Market Basics.
Begin your investment journey with our comprehensive Stock Market Trading Beginners Course.
5 Key Factors to Find Best Long Term Stocks to Buy
When looking for long term stocks to buy, you must start thinking like a business analyst, not a trader. Getting into the DNA of the company is important. A business analyst wants to look at many things. Here are five areas that you should factor into your decision:
Financial Health and Stability
A healthy company starts with a solid foundation. This means looking at key financial statements like the balance sheet and income statement. Look for consistent revenue growth, sturdy profit margins, and reasonable debt levels. A business generating consistent cash flow is an indication of a resilient business model. To learn how to scrutinize a company's financials, read our detailed guide on How to Analyze a Company’s Balance Sheet.
Competitive Advantage (Moat)
This is arguably the most important aspect. A moat is the capacity of a company to protect its advantages over competing organizations, resulting in the retention of market share and profits. This could be a strong brand, patented technology, economies of scale, or high barriers to entry.
Quality of Management
The team providing the leadership is the brain of the company. A great management team has a record, has integrity, and a sense of the future. A great management team should be open and transparent with shareholders and act in the company's best interests.
Growth Potential
For a stock to be a good long-term investment, the company must be able to continue to grow its business in an industry with good growth. Choose a business that can grow its share of wallet, build new product categories, or expand into new geographies. It's about looking for businesses that can compound growth over time.
Valuation
You can even buy a great company and it still be a bad investment if you pay too much for it. You want proper valuation - look at the company's P/E (price: earnings), look at the company's current and historical valuation metrics, then compare them to the company’s industry and company comparables. This is where you can see whether the industry and/or company is getting a reasonable valuation. For a deeper understanding of this topic, check out our blog on Fundamental Analysis in Stock Market. This will give you the tools to analyze a company's intrinsic value.
10 Best Shares for Long Term
While this is not a recommendation or personal investment advice, we offer you a list of companies that are primarily considered the best shares for the long term because they have strong fundamentals and market position. These are only examples, not recommendations. Do your research before you invest.
Reliance Industries
A conglomerate company with strength in oil refining, retail, and telecommunications -(Jio). The green energy project and push for digital services are likely a long-term growth play.
Tata Consultancy Services (TCS)
One of the largest service-based IT companies in the world, TCS is cash-heavy and has established a strong history of customer retention and reasonably consistent growth.
HDFC Bank
A large private sector bank with a stellar record in disciplined growth and strong loan books. HDFC Bank is often a core component in long-term portfolios.
Infosys
Again, an IT powerhouse with a focus on Cloud and AI-leaning services. Infosys has also been a consistent compounder for investors.
ITC
Once upon a time, the largest Tobacco company, ITC, Diversified into FMCG, agri, and hotels, and has become a very attractive stock with very consistent dividends.
Larsen & Toubro (L&T)
A leader in the infrastructure and construction space in India, and a likely benefactor of the growth in the Indian economy and large-scale projects underway.
Asian Paints
It is a company that has a very strong share of the decorative paints market. It has a strong brand and a wide distribution platform that will help in its continued future growth. It has been a consistent performer and holds a strong position for long term investors.
Maruti Suzuki
The largest passenger vehicle manufacturer in India. This will favourably impact from the increasing disposable income and greater demand for personal mobility.
Hindustan Unilever (HUL)
HUL is the most powerful FMCG company in the form of several brands. HUL has a strong position in the market and is targeting rural markets where there is a start of consumer demand, and this will provide some degree of potential long term growth.
Pidilite Industries
Pidilite is well known for its Fevicol Brand and sells adhesive products. It also holds a near-monopoly position with space for future growth. They have good pricing power and strong brand equity, so this is a stock to buy for the long term.
Note: These are just some examples - the goal is for you to take the five key factors you have studied and use them in your research and find the top stocks to buy and hold for the long term. To assist you in your research, we have created a list of the Best Stock Analysis Websites In India to help you with your research.
Conclusion
The journey of establishing wealth is built on patience and knowledge. Short-term volatility and market uncertainty are common occurrences in the stock market; however, owning quality long term investment stocks is the best way to reach your financial objectives. Take time to identify a company's financial health, competitive advantages, management, growth potential, and valuation, and you will have a durable list of investments.
Long term investing is not about "getting rich quick", as it is about the journey of establishing a future for yourself where your money works for you. All great journeys begin with a single step, so start doing your research today!
Frequently Asked Questions (FAQ)
Q1: What is the difference between long-term and short-term investing?
A: Long-term investing allows you to invest in an asset and hold it for an extended period of time (1 year – 60+ years), in order to benefit from the company's long-term growth and compounding returns. Short-term investing comes in many forms, like intraday or swing trading, and it typically involves the purchase and sale of an asset in a relatively short time to take advantage of small price changes. To find out more, you can read our blog on Swing Trading vs Day Trading.
Q2: What is the minimum investment I need to make in long-term investing?
A: You can start investing fairly small— even as little as ?500. With fractional shares and low-cost brokerage, starting your investment journey has never been easier. The most important thing is to start early and invest regularly since compounding works best over long growing periods.
Q3: Is the stock market a safe long-term investment?
A: No investment is without risk; however, the best long-term stock investments are generally safer than short-term trading. Historically, the stock market moves upward over the long term; plus, if you invest in companies with strong fundamentals, most of the short-term volatility is eliminated.
Q4: Should I buy a stock that pays dividends?
A: Dividend paying stocks can be a great addition to a long-term portfolio and provide you with income; however, dividends should not be the only basis for investment. You should always consider a company's growth potential and financial strength.
Q5: What is the ideal holding period for long-term stocks?
A: There is no one "ideal" amount of time, but many long-term investors hope to hold their long-term equity investments for at least 5-10 years and ideally even longer. The longer you hold, the more you benefit from compounding, and the less the market's short-term fluctuations will affect your portfolio.
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