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Chapter 6.2


Why invest in stocks



# 1. Best returns historically

Stock Market provides two types of return-capital gain and dividends. Investing in share markets has given better returns than any other investment asset classes historically if the investments were held for longer term. Indian equity markets have given 16% return per annum for the last fifteen years.

Dividend is generally expressed as percentage of Face Value (Rs 10, Rs 5, etc). For e.g. When a company declares a dividend say @50% and the Face Value of the share is Rs 10 , and you are holding 100 shares , you will receive dividend of Rs 500 ( Rs 5/- per share i.e 50% of Rs 10)

Indian equity markets have given 16% return per annum for the last fifteen years


# 2. Minimizes the effect of inflation

Investing in equity market is risky because of the volatility involved. If a person does not have an efficient mix of safe as well as risky investments the individual may lose the purchasing power of his saving in the long-term to inflation. When you earn money you should also take efforts to grow that money so that when in future when prices increase this money can satisfy your needs and does not lose its value. Investments in safe asset classes with fixed return don’t give the investor the benefit of beating inflation while equity investment with some risk of volatility involved give the benefit to guard against inflation risk.

# 3. Equities investment has potential for super-normal returns

While investing into equities markets you can invest in different companies and depending on their size, earning potential, reputation you can get returns on investing in them. For e.g. If you invest into shares of Hindustan Unilever(HUL) which is a reputed large size company , the risk associated with investing in HUL is nominal however the returns may also be average. If you invest into a small company the risk involved is more but the potential for growth is higher and thus the investor may get super normal returns.

# 4. Equity markets offer you cost averaging feature without timing the market

Equity markets are volatile so you can never really time the market. Investors who generally invest a certain amount of money at regular intervals of time into the markets can take the benefit of averaging the markets highs and lows and make good returns on their investments.

# 5. Equity investments can also give you tax benefit

If the shares are held for more than a year then there is no capital gains tax on the same. Thus it is profitable to hold on to Equity for long term.

# 6. Equity investments can provide regular income through dividends

Investment in shares also provides an alternate source of income along with capital appreciation and that is dividend income. When companies report their quarterly earnings and if they earn profits they can share the same with the investors as dividend.

# 7. Equity investments have higher Liquidity

It is easy to buy and sell equity in Secondary Market. Liquidity can be best explained as "For every buyer there is a seller and for every seller there is a buyer".

Key Takeaways:

  • Apart from providing the best returns across all asset classes for long term investors, investment in stocks can also beat the odds of inflation
  • Also investing in stocks can provide regular income if invested in regular dividend paying companies

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