Stock Pathshala — Module-Ⅰ
Hello readers, I hope you have gone through my earlier five blogs on personal finance. In that series, I talked about stock investing. Now we will run a series of articles that will act as a guide towards the stock market; I intend to bust some popular myth related to stock investing, such as :
1. The stock market is like gambling in a casino.
2. You need to have sophisticated computer machines; you need to be a statistician or a financial master to succeed in capital markets.
3. Stock analysis is a significant and challenging business to learn, and you must take the help of money managers.
Investing in stocks is the gateway to dreaming big!
Often we heard a friend saying, “ I wish I had enough money to start my restaurant business or a garment business.” I usually applaud by saying, “ good luck, buddy! Go ahead, chase your dreams.”. But there is something that stops them from chasing their dreams. It can be a lack of knowledge, experience, skills, funds, time, or support. What if I tell you that you can become a business owner without knowing how to run it or without any funds or sourcing? Sounds great, isn’t it!! Unfortunately, it is a fact only possible in the world of the stock market.
What to expect from the stock market?
Investing in the stock market is a great way to own good businesses, as your money is in the hands of fully dedicated business managers. You invest your money in promising ventures run and managed by highly competent pro-active thinkers like Ratan Tata, Mukesh Ambani, Adi Godrej, etc.
You may invest a small amount of money in businesses, which multiplies enormously over time due to increased business value. You invest your money and forget about it. It is the best way to let your money grow in the stock market, as businesses take time to develop.
So, can we be assured that stock investment paints such an ideal picture? Not really! It requires a great deal of patience as an investor. You need to pick the right stocks and give them time to grow. The value of stocks increases in the long run when the business grows; it takes time to achieve that.
Basics of stock market Investment
“ Everyone has the brainpower to follow the stock market. If you made it through fifth-grade math, you could do it.” — Peter Lynch
What is a share?
A company needs capital or funding to grow, expand, and function. So it releases its shares which are bought by the public. “Share” is a term used to describe a part of the ownership of a company. If you own a share of a company, you hold the ownership of the company. The investor is entitled to a profit percentage, and his liability is only limited to the share value.
What defines a stock market?
The two crucial participants in the stock market are :
Investors: Investors engage in a low-risk game that involves fundamental analysis of a company before investing.
Speculators: Speculators are engaged in high-risk betting on the expected price movement of listed companies.
Though the investors bring a lot of stability to the market, speculators are equally crucial for balancing. This is because speculators perform two critical roles:
a. Speculators bring fluctuations-volatility in the pricing of stocks
b. They frequently trade, which makes the volumes of shares available for buying and selling
How do you make money as a shareholder?
When you hold a share of the company, there are mainly two types of incomes you may earn, as follows:
Dividend income — The profits made by a company is either reinvested on the business or given away as a part of earnings to its shareholders. The amount of earnings of a company that is given to shareholders is called dividends.
Appreciation of the value of investment — One of the primary reasons to invest money in the market is to see the value of investment appreciated. An increase in the price of the shares appreciates the value of the investment.
The Stock Market is a Risky Ride — Myth or Reality?
The funniest thing about the stock market is that every time one person buys, the another sells, and both think they are astute — William Feather
Too often, people think the stock market is like gambling in a casino with a high possibility of losing all your money in seconds. But fortunately, this is not what the stock market is. You lose money in the stock market only if you are an impatient trader or when you lack the right approach to invest. One famous real-life success story of stock market investment is Warren Buffet. He owes almost all his wealth to the profits earned from stock investing. The irony is that he outperformed the best financial gurus without being a financial guru on this planet to create a multi-billion worth. It won’t be wrong to say that the stock market is like a ‘MIRROR’ — It reflects what you are.
Do you treat the stock investment as a monster or as a friend? Whatever the strategy is, the stock market reciprocates the same.
Factors Influencing the Stock Market
How much does the Stock Market fluctuate? So much so that whenever you see a graph with lots of ups and downs, you presume it to be representing the stock market. But, have you ever pondered — ‘Why do the stock prices fluctuate?’ A stock market is where price variation is seen not every day, not every minute, but every second. The stock market’s volatility is caused due to various market forces influencing it, as follows:
1. Economic Factors — Better growth prospects will increase consumption, and money flow in the market increases. This will boost the company’s earnings and, therefore, share prices
2. Geopolitical factors — Unfavourable circumstances like war, terrorism can negatively affect the business scenario. Therefore, investors refrain from investing in such unfavorable situations.
3.FIIs — Foreign Institutional Investors prefer to invest a tremendous amount of wealth in the Indian stock market with the outstanding power of selling and buying anytime. Whenever they withdraw their investments, the share market gets adversely affected.
4.Inflation — To hedge against the rising inflation, people should invest more in the stock market because no other financial instrument will give high returns like the stock market.
Other factors like Foreign Exchange Rates, Demand, supply, investor sentiment, Interest rate outlook earnings, and Trade balance affect the stock market.
Compounding — The force behind wealth creation in stocks
Compounding is when an investment’s earnings earned either from capital appreciation or interest are reinvested to generate additional income over time. So, in school, we were using this equation.
Amount= P(1+R/100)^N
The same equation is presented as Amount= I(1+CAGR/100)^T.
Here I = Initial amount, CAGR= Compounded annual growth rate, and T = Time( Number of years ).
Compounding has the magical power to magnify a small investment in the long run, which is why it is referred to as the 8th wonder of the world.
Let’s Understand this with examples-
Wipro — If a person invested Rs 10,000 in 1980, the money would have become a whopping Rs 1230 crore in 40 years by 2020 with a CAGR of 42%.
Eicher Motors — An investment of Rs 10,000 in Eicher Motors shares in 1990 would have become nearly 4.5 crores today with an average CAGR of 32%.
Warren Buffett: A live example of achieving mega-success from Compounding
He started investing at the young age of 11 years and bought six shares of an oil company at 38$ each. Though he eventually sold those shares at 40$, he soon saw that the prices of each of those shares rebounded to 200$. It got Warren thinking about the value of timing in trading shares. It is this value of timing that made him what he is today.
Soon after doing some research, Buffet invested in the shares of Berkshire Hathway in 1962. And guess what? He held those shares for many decades and is still going strong. Currently, those same shares are worth millions of dollars with the magic of compounding.
Learning: Warren Buffett is no genius, but he understood the value of investing for the long term in good stocks, which made him super-rich today.
Interesting Tip:
1. Compounding only works when the investor avoids negative years and stays invested even when the stock prices have taken an unexpected dip.
2. The stock market has multiple winners and losers at any point in time, as it gives a chance to win or lose concurrently.
So these were the hard-core basics of the stock market investment that were written to give you a clear picture of how it works. But, let me tell you, even though the stock market is so much talked about, most people are unaware of its fundamental realities. Those who wish to learn about it may get demotivated by seeing many technical charts shown on TV. But the truth is that these large financial, statistical numbers have little to do with stock investments. The good news is that stock investment is for each one of us, irrespective of our background.
Stay tuned for the next module
Thank You
