Knowing the benefits and risks before starting to invest in the stock market can position you much better in the investment field. As you are reading this post, you have already taken your first step towards becoming a smart investor.
Even if you decide to invest only once in your entire life make it worthy to be called an investment. Don’t just throw away your hard-earned money to luck. Knowing the pros and cons before you even start to invest can save your valuable money and time.
“The rich don’t work for money, money works for them” – Robert T. Kiyosaki
The above statement should be your number one reason to start investing because it is through investing that your money starts to earn more money for you, instead of you having to work day and night. The stock market provides one of the best venues to start investing with very low amount of cash.
In India, you can invest in shares worth less than Rs.100 per share. When and how you can buy those shares or whether you should be investing in them at all is a completely different topic and shall be discussed in later posts.
As of now, let me make you acquainted with the benefits and risks of investing in the stock market.
Benefits Of Investing In The Stock Market
You can start to invest with very less amount of money when compared to any other form of investing.
With the advent of electronic trading platforms, web-based and mobile-based trading applications and discount brokerages (like Zerodha) the cost and effort of trading and investing have reduced drastically.
(I am a client of Zerodha myself and I use their applications on a regular basis. The technology and features they provide are simply lightning fast. Their user interfaces are also way ahead of time and so I don’t hesitate to refer them to anyone. If you want to open an account with them, you can click on this link: Zerodha. If you want to know more on how to use their applications you can comment on this post).
In the last 10 years, the average return from stock market investments has been around 15% annually.
Currently, the average inflation rate in India is around 5.7% and the average interest rate for a savings account is around 5%. Which means the value of your money stored in a savings account will be reduced by 0.7% by the end of this year. This doesn’t mean that you should take out all your money from the savings account and invest it in the stock market – that’s insane!!!
Savings account and stocks are two different asset classes and both have their own merits and demerits. What I mean to say is that stocks can give you much higher returns. But remember, wherever there are higher returns, the risks are also higher.
In India, long-term investment in shares (shares sold after holding them for more than 1 year) is free from long-term capital gains (LTCG) tax.
There is a significant effect of taxes on stock market investments and the taxes vary depending on how long you are holding the shares. The tax laws also vary from one country to another. For more details refer to the first ‘Illustration’ on page-8 in this document provided by Income Tax Department of India)
In this digital age, you don’t need to put in a lot of physical effort to transact shares.
All you need is sound investing knowledge and know how to make use of technology. Now you can even analyze your investments’ performance over time and track your profit and loss just by using user-friendly interfaces. You don’t need to be an expert in coding!
Below is an image of Zerodha’s web-based trading app – ‘Kite’. (It has an Android version too! Check out the Android version of Kite)
To make things simpler for you, I shall share all the investing and trading knowledge I have gained through my experience. I may not be the best, but what I know and do will help you to shorten your learning curve and make you a better investor faster.
I shall even share with you, my technological knowledge so that you can make better use of digital resources around you to generate passive income.
The Indian stock market is strictly regulated by the Securities and Exchange Board of India (SEBI).
SEBI ensures the conduct of fair business practices in the stock markets. It is also responsible for the improvement of technology for seamless investing and trading in the stock market.
Risks Of Investing In The Stock Market
Though, in the long-term, the stock market can give you higher returns, in the short-term the market may pull back. In times of recession, this pullback may last very long, even a year.
Even if you are investing for short-term, you should have a pre-determined exit strategy. So, you should always have a risk-control approach in parallel to a profit-booking approach.There are several ways to control risks and I consider risk management a top priority for any investor or trader, be it for the long-term or short-term. A smart investor/trader knows when to get out of a losing investment even before he actually makes the investment/trade. This differentiates a smart investor from a dreamy gambler. A smart investor limits his losses.
But there is a good news. ‘Buy and hold’ policy may not work during a recession but there are certain strategies using which one can generate income even during times of recession.
You should never invest your savings in the stock market!!! Invest only what you can afford to risk.
As I already mentioned, savings are a completely different category of asset class and they help you to keep your principal amount safe. Invest in stock market what you can afford to lose, invest what you have in surplus. Don’t invest your emergency fund.
When I was about to start trading, an experienced investor told me “When you put your money in the stock market, forget that it’s your money”. Well, this statement is really frightening, especially when you are just about to begin. I started investing small so that my losses were also small. As my damages from losses were repairable, I could give myself more room to learn.
Eventually, I reduced my losses and made more profits. So, never suffer such catastrophic losses from which you can never recover. The longer you survive in the stock market, the more the chances you will get to make profits.
If you have any questions, please don’t hesitate to ask.
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