In one of the posts on Knowledge Hub, we understood how sensex is calculated. In this post, Kotak Securities, will outline some of the benefits of investing in Stock Market.
Financial goals can be achieved only when the investment attains its objectives. Every individual wants to ensure that his investment or portfolio grows over a period of time. Allocation of money across different asset classes is a basic part of the investment process and investing in equities or the stock market is an important part of this mix. Investing in the stock market is not a short term activity but something to be pursued over several years and decades because only then it is possible to build wealth. Many people come with the notion that their investments will make them rich overnight but real wealth can be accumulated only by discipline and systematic investing. ‘Growing your wealth’ in the stock market requires dedication and patience.
How To Grow Wealth by Investing in the Stock Market?
1) Nature of investment
Stock market investment makes you a part owner of the company in which the amount is invested. This becomes a way in which you can participate in the wealth creation that is taking place in the by choosing companies that are growing and doing well. Your money will then grow as the company you invested in starts to make better revenue and profits each passing year. Share prices of companies grow in line with the growth in profits. The speed of growth varies with each company. Some grow fast, some follow a steady growth pattern. It is vital for you to consider the opportunities in the stock market. There are companies that operate domestically as well as globally and you can invest in businesses that suit your requirements.
2) Benefits of ‘growing’ capital
Investing in the stock market provides returns for investors in two main ways. This is in the form of dividends as well as capital appreciation. While dividends can be a small stream of regular payments that arise over a period of time, the nature of capital appreciation leads to the real creation of wealth. Good, performing companies that are fundamentally sound have delivered returns for investors over the years; and there are innumerable examples ranging from Reliance Industries to ITC and from Infosys to HDFC Bank that have led to serious wealth creation for their shareholders.
3) Increasing the possibility of growth
Every financial instrument generates returns for its investors based upon its features and nature. While debt investments provide protection to capital, in many cases, the downside is that the returns are fixed. Investing in the stock market does not provide any assurance of protection for the capital invested but this can also provide returns that are very high. In that sense, there is no upper ceiling on what can be earned from stocks. This can help wealth creation for individuals if they manage to own shares that post growth significantly over a period of time.
4) Managing risk
Investing in the stock market can be risky but at the same time there are various features that can help you to manage the risk that arises. Diversification of the portfolio across geographical areas, sectors, market caps can ensure that the risk is minimised. Similarly, stock selection and portfolio creation by looking at details such as standard deviation, beta etc. can ensure that the risk is maintained at manageable levels within the portfolio. Managing your risk, and not trying to avoid it, is the way in which you can ensure that your portfolio and wealth have a chance to grow.
5) Compounding via discipline
The biggest benefit that the individual gets through the stock market is via the feature of compounding. This is nothing but the ability to earn money on the base capital as well as the additional earnings that are generated over a period of time. It is important to follow a strict discipline in investing. So even with the same percentage returns on each passing year, the amount that is earned in actual terms keeps going higher and higher. Stock markets allow you to gain this benefit as you can maintain your investments for a long period of time along with the opportunities to reinvest the earnings and compound your money. The nature of the investment is such that the returns can also be expected to be slightly higher than the other asset classes; this ensures even higher benefits when compounding is achieved. It is not uncommon to find that several individuals have been able to achieve tremendous wealth generation through disciplined investing in the stock market.
Disclaimer: Kotak Securities Limited, Reg office: Bhaktawar, 1st floor, 229, Nariman Point, Mumbai 400021 Tel no: 022 – 66341100. Correspondence Address: Infinity IT Park, Bldg. No 21, Opp Film City Road, A K Vaidya Marg, Malad (East), Mumbai 400097. Tel no: 66056825. SEBI Reg Nos: NSE INB/INF/INE 230808130, BSE INB 010808153/INF 011133230, MCXSX INE 260808130, NSDL: IN-DP-NSDL-23-97, CDSL: IN-DP-CDSL-158-2001. Investments in securities are subject to market risk, please read the SEBI prescribed Risk Disclosure Document prior to investing. Derivatives are a sophisticated investment device. The investor is requested to take into consideration all the risk factors before actually trading in derivative contracts. Mutual Fund Investments are subject to market risks, please read the offer document carefully prior to investing. Kotak Securities Limited is a distributor of IPO and Mutual Fund. Our research should not be considered as an advertisement or advice, professional or otherwise. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile, and the like and take professional advice before investing.