WHY SHOULD YOU INVEST IN STOCK MARKET?
At first, we need to understand why we should invest before thinking about investing in stock market. So let us try to see why “We should Invest”?
In society, individuals or group of individuals live together as a unit. These units require money in order to survive. So members of the unit work to earn money which we refer to as “INCOME”. Once, a unit starts earning Income, they spend it to fulfil their basic needs like food, shelter and clothing. In addition, they might also choose to spend this money on other things like Entertainment, Education etc. This outflow of money to outside is referred to as “EXPENSE”.
Based on inflow and outflow money, there are 3 categories of units:
1] Category 1: Income = Expense
Expenses are not always exactly equal for this category. Sometimes they spend more while sometimes they spend less but cumulatively they are almost equal. It is more like taking two steps ahead and coming back 2 steps to end up in the same place. Majority of people fall into this category.
2] Category 2: Expense > Income
This is an interesting category as the units are able to spend more than they earn. They do it by taking up credit using tools like loans and credit cards.
3] Category 3: Income > Expense
If given a chance, both Category 1 and Category 2 would like to move into the Category 3. In this case, units are left with surplus money at the end of every month which is called as “SAVINGS”
In order to move in to the third category, Units will have to either increase the income or decrease the expenses. However, in most of the cases, we find that the units are already running on minimum required expenses. So, usually increasing income is the only option left.
To increase income, the earning individual can take up multiple jobs to earn more money. However, due to time constraint in a day and also the amount of energy needed to do multiple jobs in addition to handling other responsibilities, this strategy is not scalable. The next way would be to empower other individuals from the unit to earn money and contribute to the household income. But I think this is an obvious method and many units would have tried it out and yet still would have found themselves in category 1 or category 2.
So the question is how do we enter into category 3 given the above challenges. Well there is one solution that we overlook. Every unit has an additional resource which is capable of increasing the income, which is “MONEY” itself. And this can be enabled by “INVESTMENT”. Investment is a process that empowers money to earn more money. And the best part is that one can actually calculate the efficiency of money to understand how well it is working through the investment process to earn you more money.
Example:
Balance in Saving Bank Account = 100 Rs
Interest Paid by Bank at the end of 1 year = 5 Rs
% Returns = 5/100 = 5%
So the 100 rs money in the account has worked entire year for you to get you 5 Rs (5% return)
Smart Investing strategies can increase your returns from money very significantly by improving its efficiently, thus helping you not only to supplement your household income but also to push you to the third category.
Investing in stock markets is one such smart investing decision. Stock Market has benefit of longevity. One can make use of systems and processes that have evolved over time that makes earning money relatively easier. However, the main advantage lies in higher returns you can achieve. In stock markets, one can earn even more than 30% returns annually on the amount invested.
Let us take example of Index Funds. For the sake of keeping it simple, let us assume that Index Fund is a company. So if you purchase Index funds worth 1 Lakh INR, you can expect to earn about 45,000 INR in 3 years’ time based on historical data. This is assuming only simple rate of return of 15%. However, if you consider the compounding effect, the returns would be even higher.
Investment in stock markets is somewhat similar to cooking. About 80% of people who cook just replicate standard procedure totally unaware of quality and contribution of ingredients to the final outcome. Only about 20% of people have some significant experience and training that helps them in having better control on the final outcome. Similarly, in stock markets, maximum people just blindly follow tips and suggestions that they see on television, internet, whatsapp group, friends etc. Only very few investors hold the correct knowledge like the trained chefs who are aware of all the elements involved and hence are able to predict the outcome with greater accuracy.
So we need to strive to become such smart investor. To do that, one needs to follow the below mentioned 3 steps:
a) Gain Knowledge about stock market and analysis
b) Learn about smart investing strategies and
c) Develop soft skills like discipline, patience etc.
Therefore, in order to get into the third category of people, it is essential to invest your money and by becoming a smart stock market investor would ensure you better returns. This will help you in achieving your goals at the earliest.
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