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This article is more than 9 month old.

Here's why you should consider investing in equity market

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In India, if you ask any random person - whether investing in the stock market is worth it or not, then the odds of listening to a negative answer would be much higher.

Here's why you should consider investing in equity market
In India, if you ask any random person - whether investing in the stock market is worth it or not, then the odds of listening to a negative answer would be much higher. Even as a kid, we used to hear such things as investing in the share market is a pure gamble, and people come here to lose everything.
You see, the reality is that the above excerpt is valid for the people who come to the stock market in pursuit of making a quick buck, and fail to do so. The share market can be a place of gambling for traders but not for an investor.
Right from Warren buffet to his Indian counterpart - Rakesh Jhunjhunwala, every successful person in the stock market is an investor.
Surely, if you’d have heard the names of successful investors like Warren Buffet or Charlie Munger, you must also have come across a word called “Compounding”.
Compounding - Eighth Wonder of the World:
Stock investing is based on the power of compounding - the secret of creating wealth wherein the longer you stay invested, the more wealth will be generated by you. In simple terms, compounding refers to a business’s ability or an asset to generate earnings from the previous earnings. Suppose you invest Rs 1 lakh in a company, and in the first year, its share prices rise 10 percent. Your investment will now be worth Rs 1.1 lakh. In the second year, the shares appreciate by another 10 percent. Therefore, your Rs 1.10 lakh would grow to Rs 1.21 lakh. In the same manner, let’s say the shares keep appreciating every year by 10 percent and you are willing to hold them for another 10 years. Then your invested capital of Rs 10 lakh would grow to 25.93 lakh. This is the power of compounding; all you had to do was hold on and wait.
Now let’s look at another reason why one should consider investing in the stock/equity market:-
It helps an individual win the race against inflation
Inflation is one of the definitive hurdles when it comes to wealth creation, and hence choosing asset classes that beat inflation is one of the efficient ways to grow rich in the long run. Suppose an investment yields you an annual return of 3 - 4 percent, but the inflation itself is 6 percent, then in this case, you would be bearing a loss of 2-3 percent.
Let’s understand this with an example:
Suppose you have invested Rs 100 in an investment that yields a 4 percent return. So, in the following year, your investment would appreciate to Rs 104. But due to inflation in the economy, the purchasing power of your corpus would reduce. Assuming a 6% inflation rate, your real rate of return would be -2 percent (6 percent- 4 percent).
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If the returns are not higher than the inflation rate, then effectively, your returns become minimal, zero, or even negative in some cases. And for this very reason, investments in FD’s or any other fixed deposit become worthless since they deliver a return of 6-7 percent, which is more or less equal to the inflation rate, so in this way, you are not making any wealth through these investments.
Stock investment returns can fetch you double-digit inflation returns if done intelligently and can help you build the corpus that you desire.
But, why invest in the first place?
When was the last time you dreamed of starting your own business? Okay, let’s remember - was it in your teens or maybe when you were in college? Surely, you might think about starting your own business every second month while you are doing a job. So what’s stopping you from doing it?
Is it the money or the time that you don’t have? Or maybe you don’t want to risk your life by betting it all in one go. Whatever may be the reason, the stock market gives you a perfect opportunity for your wealth to be managed by professional players like Ratan Tata or Mukesh Ambani. Think about a scenario where you always had a vision of starting your own bank but you lacked enough expertise and money in order to do so. But now even with a capital as low as Rs 10 thousand, you can own a part of prestigious banks like Kotak Mahindra Bank, which is again managed by one of the leading bankers in the world - Mr Uday Kotak.
Even with a small amount of capital, you can be a part of the growth rally, helping you build your required corpus. So, one has to understand that by buying a particular share of the company, he/she is not just purchasing any scrip that is being traded on the stock exchange. But, they are buying a part - ownership of the company; they invest in a business that they hold a conviction would grow.
Let’s sum it up!
Investment in the stock market is easy and fun, but it also comes at a price just like other good things. The price you have to pay is a little bit of research - research about yourself and the business. How much risk you are willing to take, and what kind of an investor you are can tell a lot about the quality of stock you should be investing in. So, invest now and enjoy the fruits of compounding later on!
The writer, Pranjal Kamra, is Founder and CEO at Finology. The views expressed are personal
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