Equity / Stock Market
It is the term which most people get wrong and think as unsafe among all Asset classes ( FD, Real Estate, Gold, Equity) and it is actually my favorite, and you know why?.... because it is the only solution for wealth creation, but over the long term and what people generally make a mistake is that they think off creating wealth by investing stock but don't want to give the same waiting period which they used to give to other products in the asset class like Real Estate. That simply means you must be playing with the rules while investing in Equity/ Stocks which I can simplify for you as Investing in the Equity is not at all like gambling or a lottery ticket where only the rarest of the rare will win but it has some maths and calculations involved behind it which is very easy to understand. So be with me and let's start
Getting an exposure of equity in your Investment basket is a must if you really want to create wealth but in the long term... Mind it. It's my favorite topic to discuss and I can write for hours on this but, if you are a beginner then I must say that there is a slight difference between directly entering into the stock market and getting exposure of equity and what is that ?.... It is as simple as that Equity is like a fruit that ripes after years of the waiting period and not like chips which you can get readymade.
So I will try to explain the topic in very layman terms with the easiest example:
Suppose you have good skills in any field and you know that it can be demanding if you go and sell it in the market. So you start thinking of doing the same but to do that you must be equipped with some basic infrastructure, facilities, brand name, product and many other things which of course need money to have all this. Now as the basic start-up requires 1000 Rs to kick it off but you are left with only 20 Rs, So what to do for rest 80 Rs.?
So there are two ways by which you can raise money or fund for your business and those are Debt and equity I.e either you can borrow money from Bank Or Individuals / Friends can share in each.
If you choose the First option and you go to the bank and ask for a loan and all related things so that the bank will lend you money but the bank needs something for assurance. The second option is your friends know your skill and they are well off in finance and ready to invest money in your skills because they cab forecast the value of your skill. So you proceeded with the second option and your friends gave you money and in return, they will be shareholders of the profit as well. Now after some time, your business kicked off and making handsome profits. Now you want to expand your business to expand your profit so again you have to raise funds for that. So again you can go to the bank or list the company.
Here Listing means, you want to raise funds for your business by inviting the public to be a part of your business. Now all the share which were initially with you and your friends will be separated in a large number of small shares at face value and will be made public to let the public buy shares who all are interested in your company or business. But the big question is that we can not sell our shares openly in the market so where and how to search for the person interested in buying your shares?...
So here comes the concept of Stock Exchange where the company goes to trade and it is a place where all types of securities are bought and sold frequently and you will find all other companies listed and it is strictly controlled by the rules and regulations under SEBI (Security Exchange Board of India). People generally meet here to buy and sell the shares of any company online, and here you also find a suitable investor in the same fashion but your company must be listed in it prior. So now you get investors as well and your business is booming, If after one year when you think for selling the shares you get price par share at par with Market Capitalisation which is just no. of shares of company multiplied by the price, so if 200 shares and each has a value of 1000 at current time than market cap is 200 x 1000 = 200000.
Ultimately you got profit but you must note down one thing here that Shares founds its high value just not because of any black magic but because investors have invested in them. So that means Stocks are not gambling in any way, but people suffer loss in it just because of own mistakes by not following the proper guidelines and rules.
In the Stock exchange Index, is a term used which is the number that shows the change in the price of something (Commodity) when u compare it with its price in the past that means it is a percentage change in its value as compared with the base parameter? Now as already discussed that Sensex is a place where one can find many companies listed and the Price of one index goes down while may go up. Sensex is made up of 30 most reputed companies that are listed on
BSE (Bombay Stock Exchange) and Index
is made up of companies that represent the sector they operate in i.e Index is nothing but a group of companies operating in a particular sector... These are also the companies most traded on the stock market. On average, Index going down and up are taken into consideration and if the average index price goes above the base value that is said to be index rising.Nifty 50
is another such index that is a group of 50 stocks or companies and so it also records and keeps tracking market health. So India has 2 large exchange BSE & NSE and both have different indices, and these are also called large-cap indices. To be included in the top 30 stock Sensex, any company must have large market Capitalization. These Large-cap companies are mature, established firmly in the market and known for giving dividends rather than rapid growth.SEBI (Security Exchange Board of India)
defines large-cap as one that features within the first 100 companies by market capitalization on the stock market, Midcap from No. 101 to 250 and Small Cap 251 and below. But in general, one other definition is being followed for Companies to be categorized as Large-cap which has its Market Capitalization of more than 10,000 Crore, Mid Cap companies have their Market Capitalization from 2500 to 10,000 Crore. While Small-Cap companies have their Market Capitalization below 2500 Crore.Sensex Index
will keep monitoring the Large Cap Companies and as Large Cap companies are more stable, well matures in the market so they will have reliably stable returns with the minimal risk associated with them.Mid-cap Index
will track firms of Mid Cap companies which are having lower capitalization than Large Cap firms and fewer share to trade with as compare to Large firms. So growth and fall can be sharp here that means the return is also good but the risk is also associated with it.Small Cap Index
will track firms that are even smaller and few shares to trade off so these types of firms have maximum returns with maximum risks along with means highly volatile.BankEx
will track stock of banking sector
Now the most important question to ask is why do we have a need for Equity Exposure for our wealth creation?........
........ and answer for this question is a simple example, Suppose you invested Rs 01 Lakh in Asset class i.e ( FD, Gold, PPF, and Equity or Stocks) in 1980 and left for compounded value. So can you imagine what is the value of those investments now... Let's take a look... The value of FD becomes 19.35 lakh, 16.10 Lakh in Gold, 32.78 in PPF and whopping 2.3 crores in Sensex.
FD always have very minimal return because it can not beat purchasing power due to the effect of Inflation, PPF performed well because of High-Interest Rate.
⇛⇛ So keep in mind always while investing in Stocks that 07 Years get some good results for your investment as the market volatility reduces and so rounded to 14 to 15 % of return you will get. Now when we compare Equity/ stocks with Real Estate Business than maximum people raise their hands in support of Real Estate, but you must know that Real Estate has higher transaction costs and lower returns than Equity.
At last, I must address some golden rules to be followed while Investing in Stocks which areas:
⇰⇰ First, we must give the same waiting period to stocks as we give to FD/ Real Estate, etc. Good stocks need at least 07 years to show good returns and 10 years to get constant returns.
⇰⇰ The second is to have proper care while choosing the products you are going to invest IN.
⇰⇰ The third is that if you don't want to take risk of choosing Fund Manager and also not ready to invest directly in stocks than go for Exchange Traded Funds.
⇰⇰ Fourth is that you must not invest in the products which keep you locked in the same product or with the same Fund Manager, which actually ULIP does. So invest in the products where the exit is possible, cheap and easy.
⇰⇰ The fifth is if you are a beginner then you must learn how to and where to invest which is very easy or else go through Mint50 coverage or Value research data and Morningstar ratings.
Remember that, you have created an Emergency fund and bought essential insurance https://gagandhayalfinance.blogspot.com/2019/11/five-insurances-you-must-have-in-your.html
so that you can put money to work for you by investing. Don't compromise with the lifestyle, as life is precious and you must enjoy that is present, so take care that you have divided the income into all three segments I already discussed in past blog like Need, Want, Saving/Investment and if you are not through then please check this link:-
So what is the best way to get an exposure of equity if you are a beginner then, I must say only answer for this…..Mutual Fund, so we will discuss it in my next blog.
So Be with me …..keep Investing….. and ready to enjoy the Future
0 Comments