Have you ever thought about investing in the stock market?
Maybe you have a cousin or a co-worker who’s always talking
about how their “portfolio” is doing, and you think “Maybe I should be doing
that, too…”
But then you do a little research and it sounds like this:
Ya!!! I know it feels like it is a gambling.
The rules were so complicated and confusing, how could I
justify put down my hard-earned money on a game of chance I barely understood?
A lot of people feel the same way. More than 90% of Indians
have 0 invested in stocks.
Many of them don’t have spare money to invest, but some might
think it’s just for risk-taking high rollers.
But is the stock market just a big casino?
Or is it something that you should be making a part of your
financial plans?
What exactly is a “stock”?
The concept was invented in the 17th century by the Dutch
East India Trading Company which wanted to allow multiple investors to
underwrite their expeditions, so they sold shares, or percentages of the
company. It worked out well for Dutch East India, making them the biggest
company in the history of the known universe, with a value greater in today’s Apple,
Google and Facebook
Today you can buy stock in companies of all sizes, betting
that the business will do well and the value of your shares will increase. Smaller,
newer firms are more risky, because while there’s a chance they could be the next
HDFC, there’s a much bigger chance they could go bust like Kingfisher.
Larger, established companies aren’t quite as exciting, but
they’re a lot more stable. I mean, who doesn’t think Maruti Suzuki will still
be selling cars tomorrow? That sounds a lot like the odds at a cricket betting.
Betting on the favourite team/ player to win a little bit of money, or go for
the big bucks by risking it all on a long shot.
When you look at the stock market up close, it can sure seem
like a gamble. But you might be missing the forest for the trees. For instance,
track one company’s share price for one year, and it looks like a wild ride. Instead
of just one company, let’s look at a bunch of companies, and instead of one year,
let’s look at 20.
The Nifty Index is a measurement of how 50 of the biggest
companies have performed over time, and since 1996, it grown by an average of 13.4%
per year over past 20 years. Sure, there are still ups and downs, but what
looked completely unpredictable up close, from a wider perspective tells a
different story.
So how do you get your portfolio? The two main tactics are
diversification and long-term investing.
Stock diversification means owning stocks from a lot of
different types of companies, which protects you from the volatility of any
specific sector.
And long-term investing, owning stocks for at least 10 years,
protects you from the volatility of any one bad day. Even a really bad day. When
the market crashed in 2008, many people rushed to sell off their stocks and
just ate the losses. But those who could stay in eventually made that money
back--plus some profits
Behavioural economist Richard Thaler actually
recommends not even tracking your portfolio at all. People who check the price
of their shares regularly tend to get spooked and sell them when they
temporarily dip, which is basically guaranteeing that they sell them for less
than they bought them, the number one no-no of playing the stock market!
It doesn’t take an economist to tell you that losing money
and making money are two very different things. Of course, there is still some
risk involved. Even a diversified portfolio can take a dive, and when life
deals you a bad card, you might need that money now, not 5 or 10 years down the
road when the market goes back up.
So is it smarter to just keep your money in a savings
account?
Well, not playing the stock market carries its own risks. As
employer-funded pensions become less and less common, Indians are increasingly
on their own when it comes to saving for retirement. And as companies continue
to grow and everything gets more expensive, if your savings are not somehow
tied to the overall growth of the economy, you can get left behind.
So...where do you start?
Most people buy and sell individual stocks through companies
called brokerage firms. It’s actually pretty easy to set up an account, and
they offer guidance on how to invest your money for a commission. Of course,
you can always pick stocks yourself, but if you’re new to it, that can be as risky
as a slot machine. Another, more common way to own stocks is through mutual
funds.
Mutual funds are pre-assembled bundles of stocks and other
investments that are designed in advance to be diversified, which spreads out
the risk--and makes them less of a hassle.
Like any big investment, the smartest first step is to seek
the help of an investment advisor who is a SEBI registered analyst, who can
help you make a plan that best fits your unique situation.
Remember, even if you keep your savings in cash under your
mattress, you’re still a part of the larger economy. Which means, in some
sense, you’re already invested in the game.
So you may as well be playing with some strategy.
And if you have your own experiences with investing in
stocks, I would love to hear them!
