If you will ask me to summarize the stock market in one line, then this is what I will say:
Little Money (थोड़ा सा धन) + Huge Patience (बहुत ज्यादा संयम) = Incredible wealth (कुबेर के सम)
"Sounds impressive. This is the place you wanna be?" In case, you're curious about how the stock market can help create wealth, but don't fully understand it, then this article is for you.
What are stocks?
Stocks, also known as equities or securities, represent ownership in a company. When you buy a stock, you are effectively buying a small piece of the company and becoming a shareholder. As a shareholder, you are entitled to a share of the company's profits and assets, and you have the right to vote on certain matters related to the company's operations.
The value of a stock, also known as the stock price, is determined by supply and demand in the market. If more people want to buy a particular stock than sell it, the price will go up. If more people want to sell a particular stock than buy it, the price will go down. The stock market is a place where stocks are bought and sold, and it can be influenced by a variety of factors, including economic conditions, company performance, and investor sentiment. The best part:
Stocks can be bought and sold on stock exchanges seamlessly - the entry barrier simply does not exist as anyone and everyone with ridiculously small amount of money can invest in them.
Investing in stocks can be a way to potentially grow your wealth over time, but it also carries some risk. The value of stocks can fluctuate, and there is no guarantee that you will make a profit. It's important to carefully consider your investment goals, risk tolerance, and financial situation before deciding whether to invest in stocks.
If it sounds scary, let me elaborate as in longer time frame this risk automatically gets minimized. Do you know why people fear stock market?
One shocking fact about stocks is that they can be highly volatile, meaning that their prices can fluctuate significantly over short periods of time. This can be especially true during times of market turmoil or economic uncertainty, when stock prices may swing wildly in response to changing conditions.
For example, during the COVID-19 pandemic, stock markets around the world experienced significant volatility as investors reacted to the rapidly evolving situation. In March 2020, the Dow Jones Industrial Average, a widely followed stock market index, experienced its largest single-day percentage drop in history, falling more than 13% in one day.
While this volatility can be unsettling for investors, it's important to remember that stock market fluctuations are a normal part of the investing process and that long-term investing can help to smooth out the ups and downs. Generally speaking, stocks have provided higher returns than saving over longer time frames. Over the last 25 years, for example, Nifty has grown at CAGR of roughly 14%, while conservative savings instruments have only returned an average of 4%. This means that investing in stocks can be a good way to grow your money over the long term. Just to give you a visual perspective, here is a chart depicting Nifty close every year end since 2006. What does it show? If you think long term, you won't lose money.
We will learn how to deal with the risks down the line in upcoming articles. For now, if you are a beginner and are worried about losing money, you must start with a smaller investment and gradually increase your exposure to stocks over time as you become more comfortable with the market. With that said, there are a few reasons why investing in stocks can be a good idea even though there is some risk involved.
Why you should invest in stocks?
Investing in stocks can be a great way to grow your money over time, as stocks typically provide higher returns than other investments like bonds or cash. By investing (click on boxes for more details):
Inflation is an increase in the general price level of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power of money – a loss of real value in the medium of exchange and unit of account within an economy.
One way that stocks can help save you from inflation is by providing the potential for capital appreciation. Capital appreciation is an increase in the value of an asset over time. As the price level of goods and services increases due to inflation, the value of a company's assets and earnings may also increase, which can lead to an increase in the value of the company's stock. If you own stocks that appreciate in value faster than the rate of inflation, you may be able to offset some of the negative effects of inflation on your purchasing power.
Additionally, stocks can provide a source of passive income through dividends. Dividends are payments made by a company to its shareholders out of its profits. If the company is profitable and continues to pay dividends, you can receive a regular stream of income from your stock holdings. This income will further help to offset the negative effects of inflation on your purchasing power.
Capital appreciation and Dividends are the keywords.
Let's say you invest INR 1,000 in a company's stock and it pays a dividend of INR 50 per year. If the value of the stock also increases by 10% over the course of the year, your investment would be worth INR 1,150 at the end of the year (assuming no other changes in the stock's value). In this case, you received INR 50 in dividends and realized a capital appreciation of INR 100, for a total return of INR 150. This means that your money is essentially earning a return on its own, without you having to actively work for it.
Just sit on you hands and watch your money grow.
One of the key benefits of investing in the stock market is the power of compounding, which allows your money to grow over time through the process of earning interest on top of previously earned interest. Instead of trading your time for money by working a traditional job, you can use the power of compounding to your advantage by investing in the stock market. By consistently contributing to your investment portfolio and allowing it to compound over time, you can potentially achieve significant wealth without having to constantly trade your time and energy for money. Additionally, by taking advantage of the power of compounding, you can potentially achieve financial freedom and build a secure future for yourself and your loved ones.
Where and how you can invest in stocks?
As per the definition above, stocks are financial products bought and sold in stock market. So to buy or sell them you need to have access to stock market or stock exchanges. The basic requirements which you need to fulfill to get fully operational in stock market are listed below:
- Opening a Demat account – Almost everyone is familiar with savings bank account which is used to hold money. Similarly you need to have a Demat account for holding stocks you buy.
- Opening a Trading account – The money you pay to buy stocks and the money which you receive after selling the stocks flows through a trading account. So you need a trading account for being an active participant in stock market.
- Transferring and receiving money - With step 1 and 2 complete, you can transfer money to your trading account from your savings account and start buying stocks. If you sell stocks from your Demat account, money will come back to your trading account. You can use this money to buy another stock or can transfer it back to your saving account.
May be the steps sound complicated, however they are not. Proliferation of internet technology has made things so easy that you even need not move out of your house to be a buyer or seller in stock market. All the three requirements described above can be fulfilled sitting at home. You just need to make a phone call to the bank which provides Demat cum Trading account facility. Almost all the banks provide this facility now a day, so pick up the phone and call the trusted one.
How much money you need to start investing in stocks?
The answer to this question might be surprising as the theoretical minimum amount needed is something round INR 25. This amount mainly goes as brokerage fee and if there were no brokerage fee the amount would have been much lower. For the time being, consider brokerage as cost of doing business in stock market. Let’s figure out the practical amount you need for being operational:
Opening Demat cum Trading Account
0 to 1000 (One time charge- varies bank to bank)
Buying a Stock
Stock Market Price (Varies from less than Rs1 to more than Rs 1000). For Practical calculation let’s say stock price is Rs 100.
Transaction Cost + Other charges
1 % of total amount (Depends on the broker you choose but should never be more than 1% )
Using the data above, the final amount you need for being operational would roughly be:
500 + 100 + 1*100/100 = 601
So for your first buying activity in a stock of price 100, you only need INR 601. This initial investment amount varies with the stock price and the number of stocks you choose to invest in. I hope now you understand why I said, stock market has a very low entry barrier.
Now you know how much money you need to be operational. So the next logical question is how much money should you start with? There is no ball park figure over here and all depends on your financial condition. Having said that, if you are a complete beginner, INR 10000 could be a good starting amount. If the amount is less than INR 10000, the transaction cost gets higher.
Treat this investment as cost of learning the new skill. Two things might happen with this investment. First, you lose some amount which should not dishearten you as it’s the fee you are paying to learn how to make money in stocks. Second, you gain some amount which again should not make you overconfident as it will prompt you to make bigger mistakes.The point is to be a humble student in the learning phase.
What are other options of entering the stock market?
You can also start investing in stocks through mutual funds where your money is pooled with other investor’s money and invested into stocks. The buying and selling of individual stocks is done by professional fund managers against a agreed upon fee. You can choose this route if you are a beginner and do not have much time for doing research on stocks.
I think this much is enough for the time being to get yourself going. Read this article again, check on the requirements and get ready with a functional Demat cum trading account. This journey is going to be life changing. But before you leave, let me prime you for the future:
If you stop treating stock market as source of income in short term, it will gradually become your primary source of income in the long term.
I will meet you in the next article of the series.