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It's all about the magic of compounding and how to move your money smartly.
Its very clear to everyone, why the stock market even exists from my previous blog. And we got to learn that it’s all about business and sometimes the businesses fails.Hence stock market becomes risky. Now other common query among everyone who is new to the Indian stock market or who are willing to join the market is HOW PEOPLE MAKE MONEY IN THE STOCK MARKET?
For many of you, this question would have been a wonder for long as everyone are interested to learn the art of making money. So let’s begin!
I hope some of you here have already tested the market and rest are here with many hopes to learn about it. Now let’s look into things more on a common man perspective. Here are the various ways by which people think someone makes money in the stock market
Its like you bought stocks at a low price and sold at a higher price, so got lot of profit. Also many have a wrong assumption that by trading throughout the day one can make a hell lot of money. Do you think so?? let me know your views on it.
As discussed in the earlier note, Business can succeed and they can fail too. When I tell businesses succeed, it may succeed at any rate we can’t imagine. For example: A company that got started for just one lakh rupees can become a thousand crores worth company or a ten thousand crores worth company as time passes.
How can this happen? This happens because there was a huge market size in which they were catering people. Their product and services were so much in demand that there were so many buyers for it. · They kept on growing at a very fast rate that the ones who invested in it made huge money.
For a moment I would like to remind you all that, I have spent quite a good time in the stock market. I have literally seen how the smart money moves. When I tell you the smart money, it’s not the money of the common people. It’s about the big money from the big players like FII’s and DII’s, how exactly they make money here in the market. Also I have seen the success stories of some people and little success from myself as well. And I feel it’s my moral responsibility more as a teacher than an instructor, to tell you all the truth that what I believe is it’s the power of compounding which helps you make money in the stock market.
FII -Foreign Institutional Investors (Institutions from foreign countries investing in Indian markets are FII's) Eg: Morgan Stanley, Pension fund of Canada etc.
DII - Domestic Institutional Investors (Institutions in India investing in Indian markets are DII's) Eg: LIC, HDFC Mutual Fund etc.
Let us now get into more deeper learning with a better example. We all know that FD will give us 6% interest rate a year, also if you keep investing in FD for long, it will become huge money after 10 to 20 years. However what if I tell you that same money can grow 40% per year.
First thing that pops up in your mind is it’s impossible! Where does money grow at 40% a year, No ways! Now using a compound interest calculator in google, I want everyone to check the answer for below query. Type on the boxes that you invest one lakh rupees for 10 years at 40% interest rate. So what’s the amount it shows in the result? Well don’t be shocked! Your one lakh is turned to 28 lakhs now. That’s the magic of compounding.
The more frequently your money earns interest, the faster and bigger your balance will grow. As interest is added to your account, you earn interest on the original balance, plus the previously earned interest. The final return on your money is called the Annual Percentage Yield (APY).Now next thing on your mind would be, where on earth do we find the companies growing at 40%? Before moving further note down this website “screener. in”, which we shall be using extensively in the course. You can use this website to search for companies peer comparison, quarterly results, profit and loss statements, balance sheet and ratios.
I shall share you an example again. Search for Bajaj Finance in the screener website. You will get the complete results. Let me show you a glimpse of the sales growth of this company on the website. Sales is net of excise duty and discounts.
As you can see there is 40% of compounded sales growth and 60% of compounded profit growth. A business is growing at 40% from last 10 years and compounded growth means year by year it is growing by 40%.
Now look what has happened in last 10 years, company with 33Rs stock price had risen between 2000 to 4500 Rs, like on average 130% over 10 years. Can you believe it? To be much clear if you have invested one lakh on this company 10 years back, by now you will have 1.3 crores with you. Wow! Sounds great.
Well earlier we calculated that if you are growing at 40% you get 28lakhs for one lakh rupees invested. But you can see in the graph that the similar growth has resulted into rather 130 times the money.
Generally the perception which is made in the market by stock brokers and tip sellers is that you keep buying and selling and you can make money. People will bring the fear in you that with very less money you cannot go for a long-term or value investment.
Take example of Bajaj Finance, 10000Rs invested around 10 years back in Bajaj finance would have turned into 13 lakhs for now. Something I want to recommend as a teacher for the ones who are new to the stock market or the ones, who are already there, is to not do intraday trading, as many lose money in it. We shall discuss this in detail in the next blog. Stay tuned....
How people make money in the stock market?
Now we know that companies make profits and if they have to grow in the compounded rate, they have to expand. For that they reinvest their profits.
Companies that are undergoing a growth phase will keep on reinvesting their profits to expand the business to higher levels. Probably during this period, they won’t be distributing any profits to their share holders.
In that case company shall grow at a faster pace and that growth will result in the stock price appreciation which in turn increases your invested money. Dividend is something which is given to every shareholder from the profits of the company.
Now let’s think of a different scenario. Let’s assume company has grown enough and they are making huge profits. Then they are not finding any ways to reinvest those profits into their own company. So they distribute it among their share holders in equal proportion.
Now think company have made 100crores of profit. In that they want to reinvest 50 crores, keep aside 30 crores on the balance sheet and distribute 20 crores among their share holders.
The distribution of profits totally depends on the stage at which the business is functioning. There are many companies which have been distributing excellent dividend, but their scope of growth is limited.
In some cases companies reinvest the complete profits for their growth. In some they reinvest only a portion of profit and rest goes to investors. In some other cases they distribute all the profits to the investors.
Hence some people keep this approach of investing in only high reputed companies.You can check out my quora profile ‘KUNDAN KISHORE’ where I have answered one query on companies offering good dividends in the last year.
How to identify the good companies that perform at good percentage?
Well this is called as fundamental analysis. I have covered it in detail with the case studies in my course on "Indian Stock Market".
These topics will be discussed in it,
A lot on the Indian economy because every business has to be aligned with the economy and sector performance.
So knowing economy is very important and knowing how many sectors are there.
To know the phase of growth of each sector
Is it a growing phase or is that sector shrinking at the moment?
Where to find the data for these sectors?
Know the nature of every kind of business.
The qualitative analysis and quantitative analysis of different companies.
Many of us are already working in one or the other sector and we know what exactly happens in that particular sector. Similar way we should try exploring other sectors too.
One should not lose hope; it’s not that tough to find good companies by applying these concepts of qualitative and quantitative analysis. It’s actually easy to learn. I would say anyone with no prior knowledge can learn it and identify good stocks on your own.
If you are here as a trader or someone who wants to make a career in just trading, I would say 95% of money moves through the fundamental analysis. It has turned to a common subject that, in the retail segment most prefers this trading thing. I am not saying you cannot make money from the trading. Lot of them have already made it.
CONCLUSION
I just recommend that if you are already doing something and you don’t have enough time, you should not trade.
You should invest actively or passively and wait for your investments to grow really at a good rate.
It’s all about business again and again.And a business with a good success rate.
Most of the positive people out there who are doing the right business will be highly successful and they may grow at any rate any day.
All you have to do is find such best companies, invest in them and just keep calm.
kundan Kishore
Curator of A Complete Course on Indian Stock Market. (www.Kundankishore.in)