IS THE STOCK MARKET A PLACE TO MAKE MONEY?
I assume you are here because you got intrigued by someone who has made a fortune in the stock market. Or you may even know someone who had lost his entire investment in the stock market and you are scared about it.
It is widely believed that taking higher risks can lead to a lot of profit in the stock market. Many investors have lost large amounts of money since they failed to comprehend that high-risk investments also come with potential losses.
It's all about how you understand and perceive the reality around you.
The common assumption is that if returns on FD [Fixed Deposit] are 6% to 7% per annum, then it's 40% to 50% when it comes to equity. But it's not the truth. The fact is that “equity gives a little more returns than FD but not at the same quantum of what everyone thinks about it”. Here we are comparing the quantum side. As per Goldman Sachs data, a global investment bank, 10-year stock market returns have averaged 9.2% over the past 140 years.
The stock market comes with volatility but FD does not. That’s why people believe it brings more returns than FD. If you compare the last decade of 2010 to 2020, where it began with a financial crisis and ended with another big economic crisis, the returns on India’s NIFTY 50 index is 9%. Anyone who would have invested the same in FD in 2010, would have made the same returns.
Here is a representation of Indian bank's return on equity, in percent, 2000-2020. The average value for India during the period was 17.63 percent with a minimum of 1.78 percent in 2017 and a maximum of 34.79 percent in 2004. The latest value from 2020 is 2.53 percent.
Why did this myth get established in the first place?
Everything seems difficult, complicated, and mysterious until we learn about it.
Even though the stock gives little more return than FD, the examples we see in the real world are too exaggerated. For example, a person buys a stock for Rs.500 and the stock becomes Rs.50000 in less time. Such stories propagate and make the common man more intrigued.
In an idealistic world, people come forward and raise money to make good products, better companies, offer great value-added services, which in turn results in a better society. But there are also service providers like brokers, exchanges, investment advisors, custodians, etc. who make more money when the stock market is a celebrated thing among people. So they showcase the stock market like it gives huge returns.
If the service providers tell the fact that the stock market gives just a little more return than others, then not many people will come forward as investors. They spread false claims most often to attract common people. So these people started promoting, propagating the stock market as something huge. Each of us has seen ads like “Our mutual funds gave 30% returns in the last 7 years. Invest today!” and many more.
Sometimes they select a particular time frame when the market is bullish and claim they have given 30% to 40% returns in the last six months. People often do not look at the bigger time frame of thirty to fifty years. But in such a time frame, you observe that returns are adjusted and you get only a little more returns and not something enormous as portrayed.
Often we think that stockbrokers or advisors possess secret knowledge about making money in the stock market and they are the only ones who have acquired this difficult skill of buying or selling stocks. If this is what you thought, why aren’t they “the richest” in the world? A stockbroker or advisor's objective is to sell enough financial services to earn their income.
Busting the myth
The unchangeable link between the stock market and capitalism.
A stock market is a place that allows you to become a part of capitalism, and not just its by-product. It is a central institution of capitalism. You become a partial owner of the company when you buy its shares. And by doing so you are directly responsible for its growth.
For many people, the stock market is a difficult thing to understand. We think it does not affect us in any way. But the truth is it affects everything we do, our daily lives. It has a strong effect on the overall wealth of our country. Stock markets are often regarded as the best indicator of an economy's strength and development.
By gaining the right knowledge one can participate in IPOs, buy shares of companies that you think are valuable. Investors should consider the nature of the business, quality of management, and valuation while deciding which company to invest in.
A company's stock market value is not indicative of its value. As per the trading pattern in the stock market, the value of an asset fluctuates.
Companies can expand operations and create jobs with the capital raised through the IPOs. On a larger scale, consumer spending increases, governments can increase tax revenues and unemployment will be reduced to a greater extent.
Price changes of shares indicate whether the economy is in a boom or a recession. Private consumption and government expenditure are directly related to the income that the companies generate. The stock market provides advantages over other types of investment as they have more liquidity and volatility.
Our world is changing at an accelerated pace. There exists inflation. An increase in inflation entails an increase in the price of goods and services. It decreases the value of your money and reduces your purchasing power. As the inflation rate increases, you can buy fewer things for the same amount of money. Often we read news like “Inflation rises 7% over the past year, highest since 1982”- CNBC.
If you do not invest your money, you would eventually end up losing your money due to inflation.
If inflation is 6%, then you need 6% more money to buy the same goods next year. Earning returns is the only way for your money to grow. Since companies borrow money from investors and creditors to invest in assets, their long-term returns are higher. Therefore, the equities market exceeds inflation for long periods of time.
A stock market is a place where your money will not get eroded due to Inflation.
If you believe in a hypothetical manner that you will double your money in the stock market, you will never get actual results. You will only live in denial. In the capitalist economy, an investor is at the origin of wealth creation as an owner of shares. Become a part of capitalism and protect your wealth by making the right decisions.
One of the famous sayings from Philip A Fisher
[American stock investor best known as the author of Common Stocks and Uncommon Profits]-
“One, which I mention several times elsewhere, is the need for patience if big profits are to be made from an investment. Put another way, it is often easier to tell what will happen to the price of a stock than how much time will elapse before it happens. The other is the inherently deceptive nature of the stock market. Doing what everybody else is doing at the moment, and therefore what you have an almost irresistible urge to do, is often the wrong thing to do at all.”
Curator of " A Complete course on Indian stock market".