A stock market, equity market, or share market is the aggregation of

Introduction to Stock Market

 

The stock market is a set of exchanges where companies issue shares and other securities for trading. The stock market is a vast, complex network of trading activities where shares of companies are bought and sold. A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks.

 

A stock market is a platform that enables the movement of capital through an efficient trading and settlement system. The stock market refers to public markets that exist for issuing, buying, and selling stocks that trade on a stock exchange or over-the-counter. We explore the basics of stock trading and understand what makes the stock move on a minute by minute basis.

 

A stock market is similar to a share market. The stock market is a financial marketplace where buyers and sellers trade shares of publicly listed companies. Stock Exchange market is a vital component of a stock market. It facilitates the transaction between traders of financial instruments and targeted buyers.

 

 

The Need to Investment

 

Why should one Invest?

 

Let us understand what would happen if one choose not to invest. Let us assume you earn Rs.50,000/- per month and you spend Rs.30,000/- towards your cost of living which includes housing, food, transport, shopping, medical etc. The balance of Rs.20,000/- is your monthly surplus. For the sake of simplicity, let us just ignore the effect of personal income tax in this discussion.

 

• To drive the point across, let us make few simple assumptions
• The employer is kind enough to give you a 10% salary hike every year
• The cost of living is likely to go up by 8% year on year
• You are 30 years old and plan to retire at 50. This leaves you with 20 more years to earn
• You don’t intend to work after you retire
• Your expenses are fixed and don’t foresee any other expense
• The balance cash of Rs.20,000/- per month is retained in the form of hard cash

 

Few things are quite startling from the above calculations:

 

1. After 20 years of hard work you have accumulated Rs.1.7 Cr.

2. Since your expenses are fixed, your lifestyle has not changed over the years; you probably even suppressed your lifelong aspirations – better home, better car, vacations etc.

3. After you retire, assuming the expenses will continue to grow at 8%, Rs.1.7 Cr. is good enough to sail you through roughly for about 8 years of post retirement life. 8th year onwards you will be in a very tight spot with literally no savings left to back you up.

 

There are few compelling reasons for one to invest:

 

• Fight Inflation – By investing one can deal better with the inevitable – growing cost of living – generally referred to as Inflation
• Create Wealth – By investing one can aim to have a better corpus by the end of the defined time period. In the above example the time period was up to retirement but it can be anything – children’s education, marriage, house purchase, retirement holidays etc
• To meet life’s financial aspiration

 

Where to invest?

 

Having figured out the reasons to invest, the next obvious question would be – Where would one invest, and what is the returns one could expect by investing. When it comes to investing one has to choose an asset class that suits the individual’s risk and return temperament. An asset class is a category of investment with particular risk and return characteristics.

 

The following are some of the popular assets class:

 

1. Fixed Income Instruments

2. Equity

3. Real Estate

4. Commodities

 

Fixed Income Instruments

 

These are investable instruments with very limited risk to the principle and the return is paid as an interest to the investor based on the particular fixed income instrument. The interest paid, could be quarterly, semi-annual or annual intervals. At the end of the term of deposit, the capital is returned to the investor.

 

Typical fixed income investment includes:

• Fixed deposits offered by banks
• Bonds issued by the Government of India
• Bonds issued by Government related agencies such as HUDCO, NHAI etc
• Bonds issued by corporate

 

As of June 2014, the typical return from a fixed income instrument varies between 8% and 11%.

 

Equity

 

Investment in Equities involves buying shares of publicly listed companies. The shares are traded both on the Bombay Stock Exchange (BSE), and the National Stock Exchange (NSE).

When an investor invests in equity, unlike a fixed income instrument there is no capital guarantee. However as a trade off, the returns from equity investment can be extremely attractive. Indian Equities have generated returns close to 14% – 15% CAGR (Compound Annual Growth Rate) over the past 15 years. Investing in some of the best and well run Indian companies has yielded over 20% CAGR in the long term. Identifying such investments opportunities requires skill, hard work and patience. You may also be interested to know that the returns generated over a long term period (above 365 days, also called long term capital gain) are completely exempted from personal income tax.

 

Real Estate

 

Real Estate investment involves transacting (buying and selling) commercial and non commercial land. Typical examples would include transacting in sites, apartments and commercial buildings. There are two sources of income from real estate investments namely – Rental income, and Capital appreciation of the investment amount. The transaction procedure can be quite complex involving legal verification of documents. The cash outlay in real estate investment is usually quite large. There is no official metric to measure the returns generated by real estate, hence it would be hard to comment on this.

 

Commodity

 

Investments in gold and silver are considered one of the most popular investment avenues. Gold and silver over a long-term period has appreciated in value. Investments in these metals have yielded a CAGR return of approximately 8% over the last 20 years. There are several ways to invest in gold and silver. One can choose to invest in the form of jewelry or Exchange Traded Funds (ETF).

1. By investing in fixed income at an average rate of 9% per annum, the corpus would have grown to Rs.3.3 Cr.
2. Investing in equities at an average rate of 15% per annum, the corpus would have grown to Rs.5.4 Cr.
3. Investing in bullion at an average rate of 8% per annum, the corpus would have grown to Rs. 3.09 Cr.

 

Clearly, equities tend to give you the best returns especially when you have a multi – year investment perspective.

 

What are the things to know before investing?

 

Investing is a great option, but before you venture into investments it is good to be aware of the following…

 

1. Risk and Return go hand in hand. “Higher the Risk, Higher the Return” & “Lower the Risk, Lower the Return”.

2. Investment in fixed income is a good option if you want to protect your principal amount. It is relatively less risky. However you have the risk of losing money when you adjust the return for inflation. Example – A fixed deposit which gives you 9% when the inflation is 10% mean you are not net losing 1% per annum. Fixed income investment is best suited for ultra risk adverse investors.

3. Investment in Equities is a great option. It is known to beat the inflation over long period of times. Historically equity investment has generated returns close to 14-15%. However, equity investments can be risky.

4. Real Estate investment requires a large outlay of cash and cannot be done with smaller amounts. Liquidity is another issue with real estate investment – you cannot buy or sell whenever you want. You always have to wait for the right time and the right buyer or seller to transact with you.

5. Gold and silver are known to be a relatively safer but the historical return on such investment has not been very encouraging.

 

 

The key Takeaways:

 

• Invest to secure your future
• The corpus that you intend to build at the end of the defined period is sensitive to the rate of return the investment generates. A small variation to rate can have a big impact on the corpus
• Choose an instrument that best suits your risk and return appetite
• Equity should be a part of your investment if you want to beat the inflation in the long run