Should I Invest in The Stock Market Now or Wait? - Aditya Birla Capital

Most of us invest our money to grow it further so that we can achieve certain goals in our life. Such goals could be anything whether it is buying a dream car, going on a long vacation, buying a home, or starting a family. Each of these goals requires money to achieve it, either immediately or in the future. Hence, to achieve these goals, one also needs to do proper financial planning to ensure that when the time comes, you have the required money with you to achieve that goal. Investing in growth assets is one way to grow the money that you are saving to achieve the goal/s. It is important to note that you invest in assets that are growth assets i.e., assets with returns higher than inflation. This is because inflation is a major enemy of your money.For instance, the cost of a vacation at your dream place won’t cost the same or less after a few years. In fact, it will cost more than what it costs now. So simply saving money or investing in low-growth assets like fixed deposits won’t help as inflation would eat up a lot of the value of your money. So, to ensure that you keep up with the inflation and grow your money with time, you need to invest in high-growth assets. One extremely popular and lucrative asset is equities i.e., investing in the stock market .

Simply put, a stock market is a place where buyers and sellers exchange financial instruments like shares, bonds , and ETF units. Exchanges like the National Stock Exchange (NSE) or the Bombay Stock Exchange (BSE) facilitate such exchange and are synonymous with the word ‘Stock Market’ as they provide the market to the buyers and the sellers. Let us understand what exactly shares are with a simple example.We come across a lot of businesses in our day-to-day life. Businesses need funds to operate and grow their revenues. The sources of such funds could be their profits, bank loans, other loans, owner’s capital, etc. So, let’s say you open a business and to start it you put your capital into the business. As a sole owner, you own the profits or bear the losses of the business. Now, let’s say your friend joins your business, brings capital for the business and you both divide the business equally. This means you and your friend divide the profits/losses in 50-50 proportion.As you grow more, you might need more capital to expand your business. There is a limit of funds that you can get as a loan so what most businesses do is to raise funds from investors by giving them proportional ownership of the business. These investors could be a bunch of HNI investors, or it could be a large group of investors including retail investors. This proportional ownership is divided into equity shares; each share representing a portion of the company. So, when you buy a share or when someone buys a share of your company, they become the proportional owner of the company and get a share in the company’s profits as well.When a company raises funds from the public at large, the issued shares get listed on the stock exchange where the shares of the company are available for exchange. To summarise, the stock market is a place where buyers and sellers exchange financial instruments like shares.

Also Read: Factors Affecting Stock Market

There are two main ways to earn from the stock market. The first and obvious way is to buy low and sell high to make a profit from your investment. As easy as it may sound, in reality, it is not so easy as the stock market is volatile, and the prices of stocks can rise and fall in minutes, or it can also remain in a small range for years.So, before you try to purchase the shares for making a profit, you need to do proper research about the company and its growth prospects and then make a decision. If your analysis goes right, the share price will rise above your buying price and once it reaches your intended price point, you can sell it at a higher price and make a profit by doing so. Typically, if you invest in fundamentally good companies and stay invested for a longer period, there are very less chances for you to make losses from your investment.The other way to earn from the stock market is earning via dividends . When you buy a share of a company, you basically buy a portion of the company and hence you become the owner of the company by such proportion. As an owner of the company, you earn money when your company makes a profit. So, when the company distributes its profits via dividends, you too receive such dividends in the proportion of the shares you own.

Also read: What is GDR in the stock market?

1. Compounding Asset

Investing in the stock market sure has its own risk but it rewards you well for the risk you take. Stocks are your best weapon to fight inflation and grow your money multi-folds. This is proven by the fact that in the past 20 years, Nifty has delivered a CAGR of 16% (as on June 2023; including dividends as well). Even if you consider the inflation rate of 7%, this is just excellent as no other assets like bonds, gold, or real estate have delivered such returns consistently over the last 20 years.So, by investing in the stock market, you compound your wealth at a faster pace compared to other assets.

2. Partial Ownership

By buying stocks of a company, you become the part owner of the company in the proportion of the shares you own. Hence, you also get a share of the profits that the company earns and distributes to its shareholders (Owners). The company shares its profits in the form of dividends. So, if you own shares of a company and the said company declares dividends, you also receive them. This can become a regular source of income for you if you stay invested for a longer period.Another benefit of partially owning a company is that you get to have a say in the decisions it makes. Major decisions in companies are made after a vote is taken regarding it from all the investors of the company; that includes you! By owning equity in a company, you gain the right to put in your vote and influence the company’s decisions.

3. Easy to Buy, Sell, and Access

Investing in the stock market and accessing your investments is easy as the brokers who provide facilitate the share trading, also provide a trading platform to you where you can easily buy or sell the shares. Plus, you can also access your holdings from there and get necessary information. Alternatively, some brokers also provide relationship managers who handle all these tasks for you.

4. Low Investment Amount

Many people believe that you need a big investment amount to invest in the stock market. But as surprising as it may sound, this is a misconception. You do not need lakhs of rupees to begin investing in the stock market. Did you know you can always start with amount as low as Rs. 101 Yes, that is right. So that is a big advantage of investing directly in the stock market.

5. Liquidity

Liquidity is what makes stocks super easy to buy and sell. When a stock's liquid, loads of people are lining up to trade it. That means you won't have trouble finding someone to buy or sell that stock you're eyeing. It's like a bustling marketplace for shares.Now, compare that to less liquid stuff like real estate. It's like finding a unicorn buyer sometimes. But here's the twist: Liquidity’s not a constant. Market moods can mess with it. When things get rocky, like in uncertain times or market volatility, the liquidity may end up going down.

Also Read: Advantages of Investing in Stock/Share Market

Now that we have discussed the advantages of investing in the stock market. Let’s take a look at the risks associated.

1. Volatility

Prices of the stocks listed in the stock market can be quite volatile. Unlike other fixed-income assets that are stable, stocks are quite volatile. As a result, the movement of the price of stocks can be high and quite irrational sometimes. Investors should be okay to see ups and downs in their investment value and not be fearful about it as in the long run, prices will stabilize.

2. Loss of Invested Amount

The price of the equity shares represents the value of the company and is related to how the company performs. You might have invested in the company as you might have a positive view of the company in the long run but, if the company is not performing as per the expectations of the investors, the price of the company’s stock can go down as they would no longer be interested to stay invested in the company and hence start dumping their investments.As a result, the value of your investments too will go down, sometimes even less than the cost of your investment, resulting in a loss. Hence, there is a possibility that you make a loss in your investment, and in the worst case, you can also lose your entire investment.

3. Higher Risk

We are well known with the phrase, ‘Higher the risk, the higher the return’. Investing in stock markets is highly rewarding. But it surely comes at an increased risk. The risks involved in stock markets are high as compared to investing in other assets like debt and gold. The prices of the stock are dependent on various variables like the overall economy, industry of the company, company’s performance, etc.As there are a lot of variables that can affect the stock’s price, the risk is also high because any bad news that might affect the company’s business will also affect the stock’s price. For example, the Russian-Ukraine war might not affect the company individually but as it can have an impact on the global economy, the stock price will also react negatively to it.

4. Time Consuming

Investing is a skill that takes time to be learned. You already know that investing is a highly rewarding skill, but it cannot be learned overnight. You need to spend a lot of time learning about investing and analysing the stocks and the industry that you want to invest in. Also, you need to learn to analyse the data and understand the fine print of the management’s goals for the company to be able to make a view for the company. As a result, it will take a lot of time and dedication from the investor’s end which for someone can be a limitation.

5. Exchange Rate Risk

Exchange rate risk in equity refers to the uncertainty caused by fluctuations in currency exchange rates that can impact the value of your equity investments. Imagine you invest in a foreign company's stocks, and the currency of that country weakens against your own currency. When you convert your earnings back, you might get less than expected due to the exchange rate change. This risk highlights the need to keep an eye on global currency movements, especially if you're investing in companies with international operations.

6. Risk of Capital Loss

The risk of capital loss in equity is like the roller coaster of investing. When you own stocks, their value can go up and down due to various factors like company performance, market trends, and even global events. If you bought a stock at a higher price and its value drops, you might end up selling it for less than what you paid. That's the capital loss. However, this risk may also be mitigated by investing long-term; as the equity market is known bounce back over time. So, remember, it's all part of the stock market adventure – sometimes you win, sometimes you learn!

Also Read: What is the Importance of Brokers in the Stock Market?

Investing in the stock market is highly rewarding when done right. You need to develop the skill of researching and analysing the correct stocks for investment. This is necessary in order to reduce the risk against the potential rewards that you can make by investing. Also, it is essential that you are aware of the risks involved in investing and understand the volatility in share prices without getting scared of it. Because, as you stay invested in quality stocks for a longer period, the volatility will even out, and the growth curve will look more even. So, start your stock market investment journey and open up the path to financial freedom today.

Also Read: Stock Market Trading for Beginners: 9 Tips That Can Actually Help