How to Start Investing in Stocks

Stocks are the best asset class that gives the highest return over a longer period of time among all the asset classes whether Gold, Land, Bank deposits, Bonds, etc. This return takes care of the inflation as well gives you a return In the form of Capital Gains. Given below are some of the average annual average cumulative returns on the Indian bourses for the last 4 decades.

1.    Average annual cumulative yield for all 30 yrs bracket – 15.6%

2.    Average annual cumulative yield for all 25 yrs bracket – 14.8%

3.    Average annual cumulative yield for all 20 yrs bracket – 14.0%

4.     Average annual cumulative yield for all15 yrs bracket – 14.0%

5.    Average annual cumulative yield for all 10 yrs bracket – 15.88%

Depicted hereunder in Tabular Format is the Sensex (Bombay Stock Exchange) since its inception in 1979.

The conclusions which can be drawn from the table above are –

1.    There is not a single 15 yr. bracket, where it has given a negative return.

2.    For every 7 Yrs. bracket stock has given a negative return thrice.

3.    In ten yrs bracket stock has only once given a negative return.

4.    Extending this time period to 20,25,30,35 &40 yrs, you will not observe any instance of the negative return.

The above chart also gives the following inferences-

1)   Long term investing in shares is well rewarding

2)   As the investment period increases, the volatility and the range of return decrease.

3)   With the increase in the period of investments probability of loss decreases.

The above conclusions and inferences will certainly influence the decision of the people on stock market investing. Besides potential high return in stock market investing. Besides, 

(i) potential high return in the stock market – the other benefit of stock market investing is-

ii)it beats down inflation.

iii)It provides a suitable avenue for diversification of your Assets

iv)Investing in the share market is simple and flexible. You just need a     brokerage account, a Demat account, and a mobile/computer. You can start by investing as little as Rs.100/-, and you can sell and purchase in the market many times in an hour. Further, these investments do not require a lock-in period.

v) You may get regular income through dividends in the stock.

Having told the pros of investing in the stock market, let us discuss the cons of investing.

The First and foremost reason why people are afraid of investing in stocks is the volatility of the Stock Market. Market volatility is much influenced by the sentiments in the Market.

On average stock market declines 10% from its high every 11 months.20% decline is seen in stock prices from its top once every 4 yrs. and 30% decline is seen from its top in every 10 yrs. However, stocks tend to recover from corrections. A decline of 10% is recovered within a few months of the decline. Therefore the longer the investor is in the market, the lower the probability of losing.

This volatility scares many people from investing in stocks. Individuals with very limited experience/ knowledge of stock investing are either terrified by horror stories of investors losing 50% of their portfolio value. eg. two bear markets that have already occurred in this millennium. Also, people are beguiled by hot tips that promise huge return that seldom pays off is not surprising.

The outlook for domestic equities remains bright in India. Till late investment climate in India was marred by low awareness of stocks. Most people still lack knowledge about the way the stock market functions. There is also a lack of trust in the stock market due to frauds by Harshad Mehta, Ketan Parekh, Neerav Modi, and Satyam Computer Scam. This low awareness about stock market functioning and the frauds perpetrated in the past resulted in low participation in the stock markets. Further, the availability of other Financial instruments which had a proven track record of returns such as Gold, Land, Bonds, and Bank Deposits led to relatively lower participation in the stocks. Gold investment is around 30% of the total investment in India whereas it is around 10% in the rest of the world. Comparatively equity investment is 12.9% of Indian total investment whereas it is 26.1% in the world. It is a whopping 55% in the United States. You may observe that the developed world invests more in stocks. This tendency of safe investments of the Indians has provided them with low to moderate returns which at times barely cover the inflation. It is also a notion that Stocks being risky are fit for only the wealthy people.

Lack of Capital has been sighted as one of the reasons for non-participation by the general public as they think that Stock investing requires a lot of Capital and it is fit for only the Rich people.

Indian investing is tilted towards Gold, Bond, bank deposits, and Real Estate which in general are considered safe investments. This tendency shows Indians in general are risk-averse. Equities being volatile are less preferred by them as investing tools.

However, with the establishment of the SEBI ( Securities & Exchange Board of India ), a regulator has been placed and Securities Markets are better regulated. Thus the general distrust in them is gradually winning. Further with the advent of Electronic technology and the evolution of many payment systems, a transaction in the securities market is getting easy. Thus resulting in better participation by the general public in the last 2 yrs. (2020 & 2021), record nos. of new Demat accounts have been opened in India.