It is that time of the year when you celebrate the good in your life. It is the celebration of the victory of the good inside you that prevails over evil. After all, it is our karma that defines our being. In the wonderland of investments, too, our traits define the state of our finances. While investing, knowledge is the only weapon you have to deal with any fear. That does not mean you need to dive deep. It is good enough to know a few thumb rules and truths.
1. Investing is only about equities
Understanding the difference between savings and investments is the most fundamental differentiator. For most people, saving money in a bank deposit or buying gold is an investment. Putting it in a fixed deposit is an investment for many of you. About 5-7% of people in the country own equity assets. That means they buy shares of companies directly or indirectly through mutual funds. Investing in stock markets is fraught with risks. However, the demon for your money is inflation.
Your savings in fixed deposits are unlikely to help you deal with it. On the other hand, fundamentally strong businesses grow and profit each year. They are better managers of capital than you. Businesses figure out a way to make profits consistently. That is the mandate given to corporate management. Your savings have the potential to beat the inflation demon only when you regularly invest in equity assets and stay invested long enough.
2. Trading is not personal finance
Many of you jumped the stock market investing bandwagon as fintech companies turned enablers. The phenomena of ‘Robinhood investing’ took the American market by storm, and retail investors thought they could hold the sway for a moment. However, that fizzled out in no time. You need a Demat account in India to trade in the stock market.
The number of investor accounts touched ten crore recently in the stock market. But monthly stock market data shows trading volume falling considerably over the past few months. That is a daily routine when you trade without holding shares in your Demat account. You are doing it to generate a trading income, and it is a business for some of you. However, you do that only when you are into finance and know about stocks to buy or sell based on technical and fundamental analysis. Most people have no idea about the risk they expose themselves to when they look to make some quick money.
3. There is no ‘get rich quick’ formula
The stock market is not a casino. As someone not into finance, it is fraught with danger as you are not equipped with the knowledge weapon. You cannot make fast money there as capital values take time to grow. They depend on the underlying businesses that make up listed stocks. If businesses grow profits consistently, share prices move up. If they post losses, share prices fall.
You can plot any company’s profits with the share price. In the long term, that is the most critical metric. When you say you invest, that means putting money into equity assets. They appreciate it over the long term. As a result, you must invest only when you know you do not need the money now. For short-term needs, you need to put money into fixed deposits or gold as the priority is to protect wealth. However, you can get rich slowly by investing regularly in equity assets over the long term.
Your future income determines your ability to take risks in the market. If you are confident about your income, you should allocate a significant portion of your monthly income to equity assets. A lot of conversations hover around age and your ability to sustain losses. However, if you have a monthly surplus that needs direction, you must pick up fundamentally strong shares you can accumulate monthly. If that is risky, you can take the mutual or exchange-traded fund route. The bottom line is that there is no such thing as ‘investing’ if your money is not behind businesses that are likely to grow profits.
(The author is editor-in-chief at www.moneyminute.in)