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Chapter 2.1

Investing in Stock Markets


This chapter explains how Investing in stock markets can build wealth for you in the long term.

Just like you can pool money with your friends and share a whole pizza when you don’t have enough money to buy one. Companies in need of money for growth can break up the ownership in the company into small pieces and get capital required for growth in return. This small piece of ownership is called a share.Just like a vegetable market provides a platform where buyers and sellers of vegetables can transact, similarly an exchange provides a platform where shares can be bought and sold. This platform was initially a physical place like a vegetable market but currently these trades take place on an online platform. Once the shares are issued by the company to the public, the shares are bought and sold among the public according to their need for money and expectations about future price movements.

As an ordinary retail investor, it is not possible to invest directly through exchanges. This is where stock brokers like AxisDirect come in. They act as an intermediary between a retail investor and exchange and facilitate trades.

A lot of people are afraid of investing in stocks because of many reasons. People think that very few people make money by investing in stocks. This is not true. Stock markets have been always on the uptrend in the long term. Hence a disciplined investor who invests in the long-term will definitely make money. One other myth that people have regarding stock markets is that it is not easy to invest in the right stocks and one needs huge knowledge to start investing.

However, we need to understand that investing is no rocket science and anyone can start investing by having a basic knowledge of how the market works and understanding what drive prices. Also Indians invest a lot in traditional investments like Fixed deposits. But these investments barely beat inflation and in the long run their return is very poor compared to the Stock market return.

The Sensex moved rapidly during 2014 and swing back and forth between 20,193 and 28,439. Even between January 2015 and October 2015, the Sensex has seen high of 29,559 and low of 24,893. What does a retail investor looking at the stock market daily make out of this chaos? These 'mood swings' of the market can test any retail investor's nerves. The rollercoaster ride experience of 2008-2009 has still not stabilized. However, events like the Middle-east conflict, rising worries on China’s growth, rate cuts and the continuous flow of Foreign Institutional Investors (FII) money, have brought volatility back into the market. In times like these, with so many news channels providing minute-by-minute advice, one need to be extremely disciplined in managing one's financial health.

When daily doses of oscillating good news and bad news make our impulse to act very high, it would be a good idea to remind ourselves of the principles that define long-term investment success. One of the fundamental principles is very simple: "Do not treat the stock market like a gambling den". Looking at short-term fluctuations in stock prices, many of us can fall into the trap of believing that investing in the stock market is like gambling; a zero-sum game. Some may completely ignore the markets, while others might want to become day traders with their entire portfolio.

Looking at short-term fluctuations in stock prices, many of us can fall into the trap of believing that investing in the stock market is like gambling; a zero-sum game.

Some of us tend to believe that when one investor loses money on a stock, someone else has gained that money. For someone to gain money in the stock market, someone else has to lose money. So the way to make money in the stock market is to take bets from a very short -term perspective on whether a share price is going to move up or down. Some investors want to do it on a minute-to-minute or hour-to-hour basis.

Gambling, as we know, is a zero-sum game. For someone to make money in gambling, someone else has to lose money. In essence, for investment in the stock market to be like gambling, the total value in the stock market needs to remain more or less constant and not grow. Thus money is simply transferred from one investor whose call goes wrong, to another investor whose call goes right. However, the truth is that the stock market is not a zero-sum game in the long run.

What allows the stock market to go against this belief of being a zero-sum game is that in the long-term, all investors can profit as long as the stock market is constantly going higher. Especially in a country like India, with its Gross Domestic Product {GDP) growth is expected at 6-8% p.a. in the foreseeable future, the total value of stocks in the market is expected to increase significantly in the long run. This should happen if the companies comprising the stock market capitalization can increase their profits over a long period of time. So, even if one loses some money on a few stocks in one year and gains on some others as long as one invests for the long-term, one would make profits.

Especially in a country like India, with its Gross Domestic Product (GDP) growth is expected at 6-8% p.a. in the foreseeable future, the total value of stocks in the market is expected to increase significantly in the long run.

And so would all the other investors who entered the market at different points in time, since prices are expected to continuously go higher over the long-term. Only in the short-term can the stock market be considered a zero-sum game, where one investor's loss may be another investor's gain. Think about this: As of 31st March 2015, the Sensex has given 280 times returns in the last 36 years, 35 times returns in the last 26 years, and around 7.5 times returns in the last 16 years. It would be difficult for an investor to lose money in such a market, if he adopts a long-term approach towards investing.

Key Takeaways:

  • Investing in Equity Market for a Long Term can help investors to Gain wealth
  • In growing economy like India, Equity markets have high probability to gain and grow your Investments

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