What is the stock market?

What is the stock market?

Investing in equities is an important investment that we make in order to generate inflation-beating returns. This was the conclusion we drew from the previous chapter. Having said that, how do we go about investing in equities? Clearly, before we dwell further into this topic, it is extremely important to understand the ecosystem in which equities operate.

Just like the way we go to the neighborhood Kirana store or a supermarket to shop for our daily needs, similarly, we go to the stock market to shop (read as transact) for equity investments. The stock market is where everyone who wants to transact in shares goes to. Transact in simple terms means buying and selling. For all practical purposes, you can’t buy/sell shares of a public company like Infosys without transacting through the stock markets.

The main purpose of the stock market is to help you facilitate your transactions. So if you are a buyer of a share, the stock market helps you meet the seller and vice versa.

Now unlike a supermarket, the stock market does not exist in a brick and mortar form. It exists in electronic form. You access the market electronically from your computer and go about conducting your transactions (buying and selling of shares).

Also, it is important to note that you can access the stock market via a registered intermediary called the stockbroker. We will discuss more the stockbrokers at a later point.

There are two main stock exchanges in India that make up the stock markets. They are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Besides these two exchanges, there are a bunch of other regional stock exchanges like Bangalore Stock Exchange, Madras Stock Exchange that are more or less getting phased out and don’t really play any meaningful role anymore.

What are the things to know before investing

What are the things to know before investing

Investing is a great option, but before you venture into investments it is good to be aware of the following…

1. Risk and Return go hand in hand. Higher the risk, higher the return. Lower the risk, lower is the return.
2. Investment in fixed income is a good option if you want to protect your principal amount. It is relatively less risky. However, you have the risk of losing money when you adjust the return for inflation. Example – A fixed deposit which gives you 9% when the inflation is 10% means you are losing a net 1% per annum. Fixed-income investment is best suited for ultra risk-averse investors
3. Investment in Equities is a great option. It is known to beat inflation over a long period of time. Historically equity investment has generated returns close to 14-15%. However, equity investments can be risky
4. Real Estate investment requires a large outlay of cash and cannot be done with smaller amounts. Liquidity is another issue with real estate investment – you cannot buy or sell whenever you want. You always have to wait for the right time and the right buyer or seller to transact with you.
5. Gold and silver are known to be a relatively safer but the historical return on such investment has not been very encouraging.

Why to INVEST

Why should one Invest?

Before we address the above question, let us understand what would happen if one chooses not to invest. Let us assume you earn Rs.30,000/- per month and you spend Rs.15,000/-towards your cost of living which includes housing, food, transport, shopping, medical, etc. The balance of Rs.15,000/- is your monthly surplus. For the sake of simplicity, let us just ignore the effect of personal income tax in this discussion.

To drive the point across, let us make a few simple assumptions.

1. The employer is kind enough to give you a 10% salary hike every year
2. The cost of living is likely to go up by 8% year on year
3. You are 30 years old and plan to retire at 50. This leaves you with 20 more years to earn
4. You don’t intend to work after you retire
5. Your expenses are fixed and don’t foresee any other expense
6.  The balance cash of Rs.15,000/- per month is retained in the form of hard cash

Going by these assumptions, here is how the cash balance will look like in 20 years.

After 20 years of hard work you have accumulated Rs.1.23 Crs.If one were to analyze these numbers, you would soon realize this is a scary situation to be in. Few things are quite startling from the above calculations:

1. Since your expenses are fixed, your lifestyle has not changed over the years, you probably even suppressed your lifelong aspirations – better home, a better car, vacations, etc
2. After you retire, assuming the expenses will continue to grow at 8%, Rs.1.23Crs is good enough to sail you through roughly about 8 years of post-retirement life. 8th year onwards you will be in a very tight spot with literally no savings left to back you up.

What would you do after you run out of all the money in 8 years’ time? How do you fund your life? Is there a way to ensure that you collect a larger sum at the end of 20 years?

Let’s consider another scenario where instead of keeping the cash idle, you choose to invest the cash in an investment option that grows at let’s say 12% per annum. For example – in the first year you retained Rs.180,000/- which when invested at 12% per annum for 20 years yields Rs.2,067,063/- at the end of 20th year.

Fight Inflation – By investing one can deal better with the inevitable – growing cost of living – generally referred to as InflationWith the decision to invest the surplus cash, your cash balance has increased significantly. The cash balance has grown to Rs.3.01Crs from Rs.1.23Crs. This is a staggering 2.6x times the regular amount. This translates to you being in a much better situation to deal with your post retirement life.
Now, going back to the initial question of why invest? There are a few compelling reasons for one to invest.

1. Create Wealth – By investing one can aim to have a better corpus by the end of the defined time period. In the above example, the time period was up to retirement but it can be anything – children’s education, marriage, house purchase, retirement holidays, etc
2. To meet life’s financial

"Where to Invest"