Do you also want to invest in the Stock market? Do you also feel like making millions and billions as you have seen some great people do? Well, if your answer is yes, then this write up is for you. You should read on.
First of all, let us understand what the stock market is. Stock market is a virtual marketplace where shares of different listed companies are traded. Shares are issued by companies to raise capital for financing its business activities. “Shares” means sharing ownership of the company. In short, if you hold shares of a company called FISHERMAN CO LTD, you have also become one of the owners of the company. If the company is making profits, it will share profit with you in form of dividend per share. The company may also not give you dividend if it is in loss or if it requires money for further usage. No interest will be payable on the shares as you are now an owner, not a lender. So, the value of the investment depends upon the company’s performance. If the company grows, demand for the shares of that company will grow & hence, the price of the share will go up and so, will the value of your investment. If the company fails to perform or goes into even deeper trouble like winding up or sale, every shareholder will run for selling the shares and there will be too much supply with no buyers. This will cause the share price to crash & thus, your investment will decrease in value or at worst, it may become almost zero.
As a new investor, you need to go through the above paragraph many times and fit it deep into your mind before proceeding further.
Now, that we are very clear about what shares mean, we will move forward to understand what are true benefits or real risk involved with this type of investment.
Benefits of stock investment:
- Regular Dividend: We are entitled to receive a dividend on the shares as & when declared by the company. Amount of dividend per share is decided by the company depending upon the company’s policy. Dividend adds to our cash flow like payment of interest does in case of fixed deposit. Please note to check whether the company you are investing, pays dividend as companies are not mandated to necessarily pay
dividendto the investor.
- Appreciation of Stock: Since the stock is subject to market forces, if the company grows in size and profit, prices of the stock is most likely to go up thereby increasing the value of your investment.
- Multi-bagger returns: Stock prices also go up as the company grows. We have seen stock prices
rise by 100 times over a period of around 10 years or even less. For example – TITAN, BAJAJ FINANCE, HDFC BANK, ICICI BANK, INFOSYS etc. Such returns are possible only with stock investing. No other sort of investment grows like this. However, there is some inherent risk with it which you need to analyse in order to be successful.
Risk in stock investment:
- Capital depletion: It is the biggest risk involved with stock investment. Shares of a bad performing company will at times fall freely and erase your capital completely. We often tend to buy a cheap scrip which deludes us into believing that the price may rise many times as the present value is very low. But this is not true. There is a famous statement – “If something is cheap, it is cheap for a reason”.
- Beneficial in the long term: It is considered beneficial in the long term as businesses take time to grow or to show signs of potential growth. Market will react only if the company shows solid signs of growth. Hence it is important to learn patience if we have to invest in stocks at all.
- No regular cash flow: Not all companies tend to pay
dividendeven if they can afford to. The company may be having expansion plans or it might be looking to reserve some money for contingency or it just wanted to boost its reserves for future business needs but unlike an FD interest pay-out or renting, a regular cash flow can’t be guaranteed.
These are just a few merits & demerits of stock investment. In order to invest in stocks, you need to analyse a company for yourself as you are going to be one of the owners of the company and you would never buy a company that has no or low growth prospects. At the end, I would leave you with two famous quotes by Warren Buffet, the great American investor.
- “Price is what we pay & value is what we get. “
- “If you can’t hold it for 10 years, don’t think of holding it for even 10 mins.”
This will continue in Part 2 with How to begin investing in stocks.
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