If you’re a salaried individual in the early or middle stages of your career, there are chances that you’ve heard about investing in the stock market.
Depending on your context, hearsay can be varied – that stock markets can make one very rich, or that the stock market is like gambling and you can end up losing all your money if you’re not exceptionally careful about where you invest. As with most things, there’s a hint of truth in both these statements – but they’re far from providing an average individual with a clear picture of stock investing as a whole.
In this article, we’ll explore the undoubted importance of investing in the stock market, including covering some important bases such as who should and should not be investing in the stock market, and some common assumptions as well. To do this, we’ll first discuss the fact as it is, and then qualify it with further explanations, thereby providing critical context to the fact.
So why is it important to invest in the stock market? Let’s get started.
1. You can beat inflation.
This is perhaps one of the best reasons to invest your money in stocks, as opposed to letting it rest in your savings account. Even as the world experiences record high inflation across the globe, the stock market has provided stable returns for millions across the globe. By investing in the stock market, you can make sure that your money does not lose buying power as you grow old, and continue to enjoy as much financial freedom as you do today!
Do you know how inflation impacts different asset classes? Check it out in our article on the TejiMandi blog.
2. You can have a voice as an investor.
When you invest in the stock of a certain company, you become a literal stakeholder of that organization. This means that you will be notified whenever there is an important decision that all the stakeholders need to weigh in on, and you will get to use your voice! Depending upon how many stocks you have, your decision may have differential weightage, but at the end of the day, you will get a chance to influence the functioning of another company – and what can be more gratifying than that?
In addition to this, you also get to support certain companies that you believe in. A lot of stock market investors today think about space that are yet to fully develop. They choose to invest in companies that can use their capital to execute their plans, and thus investors can exercise their voice by backing a company’s vision and mission with their wallet.
3. You can get high returns compared to other forms of investment.
While the possibility of high returns is always subjective, since it depends on the individual stocks that an investor chooses, there is a larger basis on which this statement is founded. On an average, the S&P index has returned its investors between 8% to 12%, while the NIFTY 50 index has given its investors an average CAGR of about 14%. If we compare this with some of the more traditional forms of investing, such as Gold, or Real Estate, the overall percentage of returns is significantly higher, especially when looked at over a larger investment time period.
The risk of losing some part of your money is always there – but so is the possibility of making it back and then making something more as well! This is why it is advised to very carefully look at your investment targets (such as saving up for a house, or education, for example), and factoring in your investment horizon as well (how long you are going to stay invested, regardless of the results). Once you consider both these factors carefully, you can always bet that your money will grow in a sustainable manner through the stock market!
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4. You can earn through dividends.
Many companies pay dividends to their shareholders, depending on how well the company has performed. This is a fact that ensures that all shareholders stand to make some additional amount of money on the basis of what they have already invested, thereby serving as a source of additional income. Although it must be kept in mind that not all companies pay dividends – only few do, and those that do, only pay dividends up to a certain amount. Therefore, it is advisable to do your proper research so that you’re aware of just how much money you stand to make as dividend from a particular stock.
In fact, there are investors whose entire strategy is to pick up as many stock of companies which pay dividends, so that they can enjoy a steady stream of passive income! So, if you can financially afford to be in this position, this strategy may work wonders for you as well.
5. You don’t have to compromise on liquidity.
There are a variety of investment options that force the investors to lock their money in for a certain amount of time. One of the most pertinent examples of this is real estate – whether you invest in a flat that has already been built or one that is being built, it’s highly likely that you’ll have to continue to hold that investment if you really want to use it to make high returns. And in case you have a need for a lot of capital in a short amount of time, you’ll still have to go through an elaborate process to ensure that you get the money that is rightfully yours – and even then you may not get it all at once!
The same is not necessarily true of the stock market. True, it does have its ups and downs, but you can still choose to sell your stocks and get the money for it in a much shorter span of time than other investments.
6. You can start small – and go as high as you want!
The stock market has a very low barrier of entry, and you can start as small as is possible for you at a given point of time. Later, as you grow and your wealth grows with you, you can take a look at how to increase your investments on a yearly basis. This is an important fact because a lot of people are not aware of this – they assume that you require a lot of money to enter the stock market, and can just as easily lose that money as well.
The truth, however, is that you can start out small and keep investing small amounts on a consistent basis to get returns that won’t be possible by investing extremely large amounts later in life! This is an act called Systematic Investment Plan and the magic is termed Rupee Cost Averaging, where you invest a certain amount of money regardless of how well or poorly a certain stock is performing, as it averages the cost of acquisition of the stock over a longer period of time. And of course, there’s no upper limit, so you can continue to go as high as you can!
You are probably familiar with SIP in mutual funds and even in stocks, but how do SIPs work in smallcases? Find out in our article on the Tejimandi blog
7. You can diversify your investment portfolio.
The stock market may seem like it’s a homogenous place, but it’s actually filled with stocks from all industries and cuts across all verticals as well! This is why you find consumer facing stocks, as well as big businesses that an average person may not know about but which are reputed within their industry. This is why you have the option to invest in clean energy stocks as well as tech and manufacturing stocks – each area is open to investment for the person who chooses to invest.
As an investor, you can diversify your portfolio across a range of areas so that you can manage your risk profile. Certain areas (such as the EV space) tend to be more risky than other areas (such as finance, especially the more reputed stocks). Depending on the level of risk you can tolerate in your portfolio, you can come up with a very diverse portfolio that allows you to get exposure in your areas of choice, while also allowing more conservative investors to balance their risk.
8. You can compound your wealth over the long run.
This is perhaps a fact that isn’t exclusive just to the stock market, but nonetheless this can lead to some tremendous results – if you make a plan and stick to it. If you exercise patience and are deliberate in your research and decisions, then you can continue to grow your wealth year on year. This requires a definite mindset, one which doesn’t falter in the face of adversity, and every seasoned investor boasts of having survived some horrible crashes. If you feel like you can be one of these investors as well, then the stock market is definitely the place for you!
Conclusion
The stock market is certainly not for everybody – it has its own limitations, and can be quite risky as well. However, if you have the right mindset and are looking to grow your wealth sustainably over years to come, then investing in stocks is one of the best ways to meet your financial goals!
Teji Mandi is a Sebi Registered Research Analyst and is a subsidiary of the financial behemoth Motilal Oswal Financial Services. We inspire trust in thousands of investors acoss the board for sound financial advice and strategized portfolio management services. You may want to check out the new-age investment avenue – TejiMandi Smallcases – on the app today. Click here to schedule a callback.
