Understanding the Stock Market : A Guide for Investors

With the current OTT boom, one TV series that has gained immense popularity is “Scam 1992.” For those embarking on their stock market journey, we highly recommend this series. Click to watch the Trailer.

Many of you might have heard from parents or others that it’s akin to a gambling den, where people take risks without understanding the outcome. Additionally, movies often portray wealthy individuals as directly or indirectly associated with the stock market. However, we want to assure you that these are mere perceptions, and the reality is quite different.

In simple terms, the stock market is like an integrated marketplace where companies can raise funds by offering a part of their ownership, known as equity, to investors. When someone says they have bought shares of a company like Reliance or ITC, it means they have acquired a very small percentage of ownership in that company by paying a specific price per share. Though the percentage of ownership may be tiny, this is the basic concept of buying shares – becoming a part-owner of the company and sharing in its future profits.

To draw a comparison with the popular TV show “Shark Tank,” entrepreneurs on the show often seek investments in exchange for a certain percentage of their company’s profits. For example, an entrepreneur may offer 10% of their equity (company’s ownership) to an investor in exchange for Rs 1 crore. This investor, after investing the money, will then receive 10% of the company’s profits.

However, there is a key difference between “Shark Tank” pitches and the stock market. The companies on the TV program are typically private limited entities, which means they can only raise money directly from individual investors and are not required to publicly disclose their financials to any government authority.

On the other hand, companies that trade on the stock market, which are known as public limited entities, have the option to raise funds from the stock market or individual investors. But they have a legal obligation to publicly disclose their financial information and performance to ensure transparency and protect investors’ interests.
In summary, the stock market provides a platform for investors to become partial owners of companies and participate in their potential growth and profits. It allows individuals to invest in the success of businesses while also ensuring transparency and accountability through public disclosure of financial information.

Theory what a book says-

1. Capital Appreciation: One of the primary reasons people invest in the stock market is the potential for higher capital appreciation compared to fixed deposits or pension schemes. While fixed deposits or pension schemes offer compounding at a fixed rate of 7% to 10%, historical evidence shows that the stock market has the potential to provide even higher compounding rates for long-term holding periods. This has been observed over time, making it a compelling reason for investors seeking better returns on their investments.
2. Beat Inflation: Let’s imagine your favourite street dosa counter. Five years ago, you could buy a tasty masala dosa for Rs 30, but today, it costs Rs 70. That price increase is due to inflation, which makes things cost more over time.

   Now, when it comes to saving money, traditional methods like keeping it in a savings account may not be enough to keep up with inflation. As prices rise, the value of your savings could shrink in real terms. Example- FD rate is 7% and current inflation 4.8%

   Real rate of return = Interest rate (%) — Inflation rate (%)

   = 7%-4.7%

   = 2.3%

   So, your real return is only 2%.

   But here’s where the stock market comes into play. Investing in the stock market can help you beat inflation. Successful investments in stocks historically have provided higher returns than the inflation rate. By investing wisely, you stand a chance to grow your money faster and stay ahead of rising prices.
3. Financial Independence: The stock market provides a pathway to financial independence and security. By investing consistently and prudently, individuals can accumulate wealth that may eventually provide passive income through dividends and capital gains. Achieving financial independence allows individuals to meet their financial needs and goals without being solely reliant on a regular job or income source.

But in reality, people come in stock market is for primarily two motives-

1. Fun: As humans, we often enjoy a little excitement and speculation. It’s in our nature to take small risks and have fun with it, just like a friendly bet or game. This is where the stock market can be intriguing for some people. It offers the thrill of investing small amounts and seeing how they perform, satisfying our speculative side while staying within our comfort zone.
2. Making Money in a Short Time: Let’s be honest; making money quickly is something most of us dream about. While it’s essential to remember that the stock market is not a guaranteed get-rich-quick scheme, it does provide opportunities for potentially higher returns in a relatively short period.

Now that you have understood both sides of the coin regarding the stock market – the book’s perspective and the reality it presents – we encourage you to choose the book’s viewpoint. Embrace the exciting possibilities it offers, while also approaching it with awareness and informed decision-making.

Happy investing!