Despite the ups and downs of the Indian economy, the stock market has consistently proven to be a good place to invest your money.
Your regular savings won’t do much if you leave them in the low-risk investment options.
Without taking advantage of the stock market, saving for lofty goals becomes hard, if not impossible unless you are already rich.
5 Reasons why you should consider investing in stocks
Here are the 5 compelling reasons for you to start investing in the stock market.
1. To dream big in life
Investing in stocks is one the best path to chase your big dreams in life.
To explain this point, let me give a very simple real-life example.
I will quote you a recent example that would address if you need to invest in stocks at all.
Let’s check out this example with a lens of two persons, Ram and Shyam.
Ram is a hard-working IT employee. He saves and invests regularly in low-risk investment options like Fixed Deposits (FDs), life insurance, government bonds etc.
But he has future needs and responsibilities as is the case with any middle-class young person.
In the month of July of 2013
Ram gets an annual performance bonus from his company. He clubs this with his savings and buys himself a Maruti Suzuki Swift Dzire under his corporate promotion discounts scheme.
The car costs him approximately ₹6,00,000.
He gets the pride for his family and instant recognition in the society, along with the convenience.
Ram is very happy.
Shyam earns as much as Ram in the same IT company.
However, Shyam realizes the strength of Maruti Suzuki’s brand appeal to aspirational youth like Ram and realizes the huge potential this car company has to grow in future times.
He decides to skip the corporate car promotion scheme and invests the same money buying the stocks of Maruti Suzuki India Pvt. Ltd.
Price of each share in July 2013 was approximately ₹1,500. He got 400 shares of Maruti Suzuki India Pvt. Ltd. for ₹6,00,000.
5 Years later.
By 2018 July, just 5 years later, Ram’s Suzuki Swift Dzire though helpful, now is running old.
It’s depreciated value in 2018 is approximately ₹1,20,000. But never mind. Ram got his money’s worth & is still at it.
The Maruti Suzuki India Pvt. Ltd. company meanwhile has grown immensely as Shyam anticipated in the year 2013.
The share price in July 2018 was at ₹9,000, up almost 6 times from ₹1,500 just 5 years ago.
Shyam’s stock investment into the same car company has skyrocketed to ₹36,00,000 i.e. 6 times the original investment he had made.
That is a neat 36 lacs rupees in hand!
Good enough to buy a BMW, right?
Shyam partially sells his shares in Maruti Suzuki India Pvt. Ltd. and decided to buy a car.
Finally! What car does he buy?
Let’s park that aside for a while.
Back to your question. Why is it important to invest in the stock market?
If you have 2 options to spend the exact amount of money like the two men: Ram and Shyam above, the decision comes down to a very basic question.
2. Keep pace with inflation
You’ve probably heard of inflation before, but it is sort of a strange concept in the financial world.
In simple language, you can think of inflation as the slow and steady force that makes things cost more over time.
Recall how your grandfather could go see a movie for just ₹10 or less?
Well, now it costs you ₹100 or even ₹200 to go see a movie. That is largely because inflation makes the price of goods and services go up over time.
What that means for you is that your hard-earned money is slowly losing its value over time.
Terrifying, I know.
Inflation is not your friend when you’re trying to save for major life goals, like buying a house, saving for a comfortable retirement or saving for your children’s education.
Consider that the historical inflation rate in India the hovers at around 4% after the year 2013.
Then think about how this could eat into the purchasing power of money that is invested in bank FDs or savings account.
You can usually earn a higher rate of interest on FDs than savings accounts and you might even be able to keep up with or slightly surpass the historical inflation rate in India.
But your money is tied up for the term of the FDs which incur a tax of 10% on the gains.
Putting it in simple words,
If you have enough money saved up to buy a new Honda city today, and you put that money:
# under your mattress in the home, in 10 years you will be able to buy a low budget bike.
# into bank FDs, in 10 years you will be able to buy a high-end Honda accord.
# but if invested wisely in the stock market, in 10 years you will be able to buy a high-end car of BMW, Audi, or Mercedes.
3. Because historically they have gone up
Overall, the Indian stock markets have tended to rise over the years since launch.
Yes, there have absolutely been devastating crashes, pullbacks of stocks, and periods of bad performance form many companies.
But overall, stocks have formed a steady march upwards as India and global economies have grown with the time.
4. Diversify your investment portfolio
Diversifying your investments by including some stocks, along with your low-risk investments like government bonds, savings accounts, money market accounts, FDs etc, can help protect you from the inherent volatility of the financial markets.
Often, when the stock market is down, the bond market moves upward and vice versa.
You can better control the market volatility by investing in stocks, where you are concerned about spreading your money around.
To put it simply, do not put all your wealth in only one type of investment instrument.
5. They are easy to invest in
Stocks are often called one of the most liquid assets, which means they can be quickly turned into cash.
What is great about stocks is that they are relatively easy to invest in.
You just need to sign up with an online stock trading broker, click a few buttons or touch in your mobile screen, and start buying and selling stocks.
No doubt that there is definitely research to be done along the way to make sure you are making the right investments for you.
But comparing investment in stocks with buying real estate or investing in a small business, stocks are fast, easy, and cheap to trade.
A lot of people invest in the stock market as they feel like their money is never far away and can always be called home in an instant.
But there is absolutely no need to rush out right now and start investing in the Indian stock market.
The first thing you should be doing is to do your homework, be realistic about your goals and expectations, and figure out how to use the information that’s available to you to your best advantage to achieve financial goals.
Always remember that if you are buying a stock, someone else is selling it.