Different people have different perspectives on stock market investing. While some believe that it’s the best way to create fortunes, others say it’s a trap where you lose all your money. And we cannot overlook the fact that both these things have happened with people.
Some people ended up becoming billionaires while others lost their hard-earned money. It’s because some of them learned and eventually created the right strategies. Others were just discouraged by market fluctuations and sold their shares in loss to exit the market.
Learning is where all the difference lies. Investing for beginners is challenging, but if they enter the market with an intention to learn first, they will eventually earn in the long run. Stock trading is all about building the right strategy, being consistent, and learning with time.
As a beginner, you might still have lots of questions in your mind. Further in this blog, we will be discussing some very basic concepts that will help you understand the stock market and reasons why it is the best asset class.
Suyog Dhavan has very well explained ‘investing and stock market basics for beginners’ in the attached YouTube video, and we have drawn some key insights from the same to help you:
What is Inflation, and How Is It Reducing Your Purchasing Power?
Before we proceed further to discuss anything about stock trading, you should understand what inflation is and how it impacts your financial health. So, basically, inflation is the measure of increase in the prices of goods and services over time. The inflation percentage is calculated by averaging the price changes of goods and services over a period of time.
When inflation increases, you can purchase a fewer number of goods with the same amount of money. So, inflation reduces your purchasing power. In order to keep up with inflation, your earnings should increase more than the inflation rate. For example, if the inflation rate increases by 6% and your salary increases by 5% in a year, you are actually becoming poorer.
So, what’s the best way to keep pace with inflation in the long run? How can you beat inflation and retain your purchasing power? The best way to do this is by compounding.
Power of Compounding
If you are able to grow your money more than the inflation, you can keep pace in the long run. This is where the power of compounding comes into play. People often consider compounding as just another way to build money over time, but don’t know its actual worth. Compounding can help you create a fortune.
Albert Einstein says, ‘Compounding is the 8th wonder of the world,’ and that is very true. In the attached video, Suyog Dhavan has given a perfect example of compounding with the help of a story, where a poor poet ends up becoming the king with the help of compounding. The same works in stock trading/investing as well.
Compounding works in favor of investors as money grows in such a way that it can beat inflation. But for that, choosing the right assets is very important. A small difference in return percentage can make a huge difference in how much money you make over time. “Doubling returns increases money by more than double, says Suyog Dhavan.”
Let us now discuss different asset classes and see which one can benefit you the most
1. FDs (Fixed Deposits)
Many people consider fixed deposits as a safe investment option with guaranteed returns. But what if we tell you that investing in bank FD is a loss-making proposition? Suppose you are getting a return of 7% on your FD and the inflation rises by 6% during that period.
Now your actual returns will be: interest earned – taxes on the interest (7% interest – 30.9% tax out of it), which is less than 6% – the inflation rate.
So, you are actually losing the money as your money is not growing as per inflation. In fact, this money of yours is being used by banks to make more money. Banks give this money to businesses with a higher interest rate to make a profit.
So, the FD is only benefitting the banks. Also, whether or not you will get back your entire money depends on whether the businesses repay their loans or not.
Therefore, even investing in banks is not safe as, beyond a limit, banks are not liable to pay you anything in case the bank does not receive loan repayments from businesses.
Rather than making this risky and loss-making deal, you can consider directly investing in businesses by:
- Lending directly to corporates through corporate deposits, debentures, bonds, etc), where you can potentially make 8-9% annually.
- Being part owner of a business by owning shares, where you can potentially make 15-25% annually.
2. Gold & Silver
The next quite commonly considered asset class is Gold. Looking at the current all-time high price of Gold, it might look like the best asset. But keep in mind that there have also been times of stagnation where gold prices didn’t move for years.
There is no doubt that gold can protect you from inflation and it can help retain purchasing power, but it will not create you fortures. Gold can be a good hedge against inflation, and it’s always wise to allocate a small part of your investment portfolio to this haven asset. The same goes for silver as well.
3. Stock Market
Now, the third and most awaited one – the stock market. This can be considered a great option in terms of long-term wealth creation. BSE-Sensex has given 16.5% average returns in the past 42 years (from 1980 to 2022), making it the best asset class for investments.
Under Sensex, there are good companies as well as bad companies, and the combined average returns have been 15% in the last three to four decades.
But when investing in the stock market, you need a lot of patience and consistency. Keep in mind that money is not consistent in the stock market, as Suyog Dhavan explains in the video. The 15% return mentioned above is not year-on-year, but it’s the average of 40 years.
Sometimes, the returns were as high as 267%, whereas some years even gave negative returns. You might not make money for three years or feel like your money is lost, but the fourth, fifth, or sixth year may give you the returns of all these years.
Equity is not risky in the long term but super risky in the short term. Equity here means owning shares of a company through stock trading. The probability of loss decreases as the number of years increases and this has been explained very well in the attached video with the help of data and graphs.
Keep in mind the fact that “Prices are slaves of earnings in the long run” – if the earnings of a company are growing, the stock prices will go up some day or the other. So it won’t be wrong if we say that Equity is the only wealth creator in the long term. Other assets can help you retain your purchasing power, but equity or stock market investments will help you build wealth.
Why Are We Referring to India as ‘Sone ki Chidiya’ (Golden Bird)
Looking at the current growth of India, there is no doubt that the country is developing at a fast pace. There is a worldwide demand for the Indian workforce and we are providing services globally.
India is where China was in 2005-2006. Now, the population of Japan, China, and the US is growing old, and India is young. This is a great opportunity for India to grow multifold and become a global leader.
If the world needs to grow, it needs young people. Now, as other countries’ populations are growing old, India will provide workforces to the entire world, which is why it is highly likely that share prices will only go up now.
Two Ways to Create Wealth/Build Fortunes Through Stock Trading/Investing:
1. Mutual Funds:
These are suitable for those who don’t have enough time to learn and look at the stock market. These are basically funds created by different companies or managers who invest in a group of stocks on your behalf, and your returns are combined returns of all the stocks or assets they have invested in. In this, you can expect returns of 10-15% CAGR.
2. Direct equity/Stocks:
This is suitable for those who can invest in themselves to learn and give proper time to stock trading regularly. With the right strategy, you can expect returns of 25% CAGR.
Investing for Beginners – How to Invest Wisely?
Now as a beginner, it can be challenging for you to learn stock trading or practice it. But remember that you need to start at some point. The sooner you start, the better. Here are some tips for beginners to start investing wisely:
- Start investing early: Whether you are in your 20s or 30s, it’s never too early to start investing. As you learn stock market basics for beginners, you can start investing small amounts to learn things practically.
- Set investment goals: You should have clear investment goals, such as ‘I want to make this much by that particular year.’ This will help build the right strategy aligned with your goals.
- Invest regularly: Be consistent and invest regularly in the stock market. It’s not about how big you start with, but how big you make it over time.
- Be patient: As mentioned earlier, patience is the key to success in stock trading. So, be patient and do not panic with small market fluctuations.
Learn Stock Trading for Beginners at Strategic Alpha
Strategic Alpha is a leading mentorship platform and has built a large online community of investors called Conviction Club. If you are just entering the world of stock trading, it’s common for you to feel overwhelmed. But worry not, as the internet is full of sources today.
You can join Strategic Alpha’s Conviction Club or attend stock trading workshops held by our experienced mentors on the Strategic Alpha YouTube channel.
Happy Learning & Investing!!
Team Strategic Alpha,
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Very important note: The objective of this blog is to share knowledge and info about multi-bagger ideas/opportunities. Neither is this trading website nor an analyst website nor a Buy/Sell call website. For stock market success, always do your homework, own analysis, and make your own decisions.
