Generally speaking, people are in quest of ways of achieving financial freedom. You may be aware of umpteen number of opportunities for it and the Stock Markets are one among them. Many people hesitate to consider the Stock Market as an investment option owing to the inherent risk factor in it.
Let us have a detailed analysis of the stock market as an investment opportunity.
1. Stock Market has the potential to offer High Returns.
The foremost reason to invest in the stock market is that market investments offers high returns in the long run. Historically stocks have proven to outsmart all other modes of investments, provided the investment period is sufficiently long. And that too, irrespective of the bullish or bearish nature of the market.
2. Stocks offer high degree of liquidity
Stocks can be converted to cash when needed, without any time delay. Liquidity makes it a more flexible mode of investment option compared to others like gold, land, etc.
But liquidity issues can occur for stocks also. The liquidity of stocks generally refers to how hard or easy it is for a market participant to sell the stock without affecting the price.
Why does this happen?
The liquidity of a stock is determined by many factors like the volume of trade or the bid-ask spread. (the difference between the bid price and the ask price)
The liquidity of the stock can be affected if you are trying to sell a stock that does not have demand in the market.
what's the way out?
A good rule of thumb here is to trade stocks whose daily trading volume is 3 million.
3. Stock markets have the power to give compounded returns
Have you ever wondered at what makes an avalanche so powerful? A force so massive actually starts from a very small piece of snowball.
Your wealth works the exact same way. The work you need to do in the beginning is often very painful and tiring. But once your wealth snowball is built, then your wealth naturally attracts more wealth. Then the power of compounding interest can work in your favor.
Just as a snowball compounds and grows, so can your wealth.
Compounding is the process by which stocks create a huge wealth in the long run. But unfortunately, people fail to understand the power of compounding and fail to reap the benefits.
In simple words, can compounding be defined as the power of money creating money, The idea here is the earlier you start investing, the greater you will gain in the portfolio. This is why warren buffet, mentioned that he regrets investing late-though he started investing at the age of 11.
Let us see how compounding works in real life. Let us consider four persons starting Rs. 5000 per month investment but starting it at different stages of life.
| Amount received on investing Rs.5000/month | |
|---|---|
| Investment Starting Age | Amount received at age 55 |
| Age 20 | Rs. 1,15,45,875 |
| Age 30 | Rs. 47,86,833 |
| Age 40 | Rs. 17,41,726 |
| Age 50 | Rs. 3,69,834 |
| Interest rate considered is 8% compounding | |
If we analyze the conclusions made from the table above the results can amuse you. That’s the magic of compounding. so next time amid a bearish market don’t panic sell. It may cost you a fortune.
Compounding in stocks is similar to a multiplier effect because the value of the amount invested grows at a geometric rate.
Read this interesting article on Insurance vs other investments – Everything you should know.
4. MONEY SITTING IDLE CAN DEPRICIATE IN VALUE
Have you ever thought about what happens to the money that you keep in your safe at home? You would say nothing happens as money is intact at your home.(unless your money is stolen). Well, you are wrong! because your money is being eaten slowly by a silent villain who is none other than the inflation.
To keep things simple, think of inflation as a phenomenon that kills the value of your savings slowly and stealthily overtime.
Let’s take an example,
your grandfather could buy candies at 1 or 2 paise during his childhood, but why is it not possible now? It is because the value of paise has depleted over time. We can define inflation as the gradual depletion of the quality of money over time.
Believe it or not, this is a phenomenon that would certainly happen with time. This happens because the cost of goods and services goes up over time, making goods and services expensive and thereby depleting the value of money. It will leave you with nothing left in your savings at your retirement age.
So what is the way out?
The solution for this is to channelize your savings into different investment vehicles such as real estate, bonds, gold, and stocks.
Investing in stocks that consistently providing high dividend yield can help you to tide over this problem to some extent. Examples of stocks that have provided a good dividend yield are Vedanta Ltd, Oil India Ltd, REC Ltd, etc.
If you saved money to buy a car and invested in various options…What can your money become in 30 years…
Eventually, you may buy a bicycle…
You may be able to buy a house with that money…
Who knows you may own a private jet after 30 years…
5. Invest in stocks to accomplish your financial goals
investing in stocks early can help you accomplish your financial goals like buying a home, children’s education, or a foreign trip.
A successful investor has to be patient and wait for the market to do its work. A successful investor is the one who waits for the right opportunity and grabs it to make the most of it.
Investing in stocks doesn’t mean blind speculation or owning a part of your favorite company. It is, in fact, searching for value at the cheapest price to acquire financial freedom.
Please read Stock market investments – 11 golden rules for beginners also.
