Due to inflation, which is the increased price of goods and services over a period of time, simply earning and saving your money is never enough. If your savings are simply lying dormant over a number of years, their value is decreasing due to the phenomenon of inflation. You need to make that money grow over a period of time to keep up with inflating prices. And one of the best ways to do that is by investing in the stock market. Yes, there are certain risks associated with stock market investing, but on the other hand, there are many advantages as well.
Read to find out more about what exactly the stock market is, how it works, and the risks and benefits associated with it.
What is the stock market?A stock market is a place or a platform where investors can buy and sell financial instruments like shares and bonds. A stock market exchange, like the Bombay Stock Exchange and the National Stock Exchange, BSE and NSE in short, respectively, are stock exchange mediators that allow buying and selling stock. But what is a stock or a share? In the most basic of terms, when someone opens a company, they alone or a group of people who founded the company are sole owners of the company.
For example, if you and your friend opened up a new company with a fifty-fifty partnership, then both of you own half of the company, and any profits gained by the company will be split down the middle between the two of you. Now, if you want to raise more money for your company, either to expand globally, or to branch out, then one of the options you have is to make your company public. Making your company public, in the simplest of terms, is to make your company available to the public in the form of shares.
Thus, if you issue 100 shares of your company, that means that your company now consists of 100 parts. And if an investor buys one of these 100 shares, then that investor is the owner of 1% of the company. So, any profits gained or losses incurred by the company shall be shared to the tune of 1% by the investor.
On the stock market, you can buy many shares of many companies as per your requirement. That makes you a part owner of that company, even when you buy a single share.
How is money made on the stock market?There are two main ways to make money on the stock market. The first is by buying and selling your stock at the right time to gain a profit. The stock market is a volatile place, and the price of shares goes up and down at the drop of a hat. When buying shares of a particular company, you need to do some research and be sure that the company will be successful and gain profits. If that is the case, the price of that company’s shares will go up. And once that happens, you can sell your shares of that company at higher prices and thus gain profits.
Another way to make money is by dividend stocks, where companies divide their profits among their shareholders. So even if you own 1% of a company, and that company makes a profit, you shall receive your 1% worth of the profit as a dividend.
Benefits and risks of investing in the stock marketThere are safe ways to grow funds and then there are risky ways. The safe ways, like putting your money in a fixed deposit and earn interest, invest in mutual funds or real estate, will ensure that you that the risk of losing your investment will be minimal. But on the other hand, the earnings will be comparatively lesser and slower. If you want greater returns for your investment and are willing to take certain risks, then investing in the stock market is the best option.
Yes, there will be various factors affecting the stocks risk and return, but you have to take that chance if you want to gain significant profits. Let us dig deeper into the risks and benefits associated with stock market investment.
Advantages of investing in shares
Return of investment in short timesInvesting in the stock market is one of the best ways to gain higher returns in shorter periods of time. It is currently the best way to fight inflation. Unlike other investment options like bonds, real estate and fixed deposits, which are safe but slow, stocks have the potential to grow higher in short durations. In the last 15 years, the stock market in India has shown returns of up to 12.5%, which is significantly higher than the average inflation rate of 6.6%. Thus, investment in the stock market is an excellent way to counter inflation and realize your financial dreams.
Buying shares makes you part owner of the companyOne of the advantages of buying shares in a company is that it makes you a minority owner of the company. When you buy stocks of a particular company, you’re buying a small part of the company and getting ownership stake of the company. Yes, the ownership stake might appear small and inconsequential, but it is not, You, as a shareholder, get to vote on certain business decisions and corporate leadership that directly affect you. And to top that, you also have an easy exit strategy. If you feel you want to opt out of the ownership stake, all you have to do is sell your shares, and then it is somebody else’s business.
Easy to buy and sell stocksIn today’s electronically connected world, investing in stocks is extremely easy and convenient. You can buy stocks via stockbrokers, financial advisors and even buy your stocks online. Once you have your trading account set up, you can begin your stock market investment journey. The same is true for selling your stock. If you want to sell your stock after an increase in share price, giving you profits, you can do so within minutes. Even if you require some emergency funds, you can sell your stock for cash very quickly.
Risk of investing in shares
Loss of investmentIf the company you bought shares in, is not performing as you expected, instead of the stock price going up, it may go down. So, the shares you bought will cost even less than before, making you lose money on your investment. As mentioned earlier, the stock market is a very volatile market, and if a company performs poorly, all investors will start dumping their shares and the stock value will fall drastically. There is a possibility that you may lose your entire investment as well.
Higher riskAs they say when it comes to the stock market, if you want higher returns, the risks will be greater too. Investment in the stock market is highly unpredictable and the economy can go bad at any time. The stock value can go up or down based on a variety of different things. It can be a business decision in the company, or a change in leadership of a company that can change the stock value of the company. Even the things happening outside the company bring the market down, like terrorist attacks and other global phenomena.
It can be time consumingYes, it is said that investing in the stock market gives higher returns in shorter spans of time. But before you invest, it is important to spend a lot of time studying the stock you have in mind. It can be very time consuming to keep an eye on a company's stock and see how it moves up and down. One must perform a lot of research and market analysis before buying the stock of a company.
Therefore, investing in the stock market can be quite a lucrative affair if you know what you’re doing. Plenty of research and analysis is required to make sure the benefits of investing in shares outweigh the risks. At the same time, it is detrimental to be too conservative when you’re investing in the stock market. Of course, there is nothing to worry about if you’re a safe investor, but you can miss out on some good returns if you do not take any risks. So, keep all this in mind and begin your stock market investing process.
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The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
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