Common stocks represent fractional ownership of a company. As a stockholder, you can continue to own the stock until you choose to sell it or until the company goes out of business or is merged into another company. There are two styles of stock ownership: long-term investing and short-term trading.
"Buy and hold" is a term that refers to long-term investing. A long-term hold, as defined by the Internal Revenue Service for tax purposes, is owning a stock position for one year or longer. Theoretically, the longer you hold a stock, the more likely you will ride through periods of volatility and eventually enjoy profits as the underlying company grows. This is based on the presumption that a good company will continue to grow its business and revenues over time and the stockholders will participate in that growth through stock price appreciation. Long-term holding also applies to dividend-paying stock that will continue to provide dividend income over the long-term.
Short-term trading is not limited to day trading. The IRS defines short-term holdings as those that are sold within one year of their purchase. A short-term holding of a stock is primarily associated with trading the stock to take advantage of short-term market volatility that produces a quick profit.
Tax treatment of short-term and long-term holding periods is different. Short-term capital gains are taxed at a higher rate than long-term capital gains. Historically, the actual tax percentages applied to both holding periods have fluctuated. This tax treatment is designed to discourage short-term trading and encourage long-term investment.
While short-term trading may seem enticing, as it presents the possibility of quick profits, it takes considerable skill to time the market. It also costs a lot of money to pay the transaction fees for numerous trades within a short period of time, which shrinks your profits.