Equity is the term that most people get wrong and think is unsafe among all Asset classes ( FD, Real Estate, Gold, Equity). But it is actually my favourite, and you know why? Because it is the only solution to wealth creation for you, but in the long term. What mistake people generally make is that they think creating wealth by investing in the stock market is instantaneous. People don’t want to give the same time period to ripe the fruits out of this investment which they give to other products like Real Estate.
That simply means you must play with the rules while investing in Equity/ Stocks. Because Investing in Equity is not at all like gambling or a lottery ticket where only the rarest of the rare will win. It has some maths and calculations involved behind it which is very easy to understand. So be with me and let’s start
Getting exposure to Equity in your Investment basket is a must if you really want to create wealth in the long term. It’s my favourite topic to discuss and I can write for hours on this but, if you are a beginner then I must say that there is a slight difference between directly entering into the stock market and getting exposure to equity. It is like a fruit that ripes after years of waiting period and not like chips which you can get readymade. So I will try to explain the topic in very layman’s terms with the easiest example:
What is Market
Suppose you have good skills in any field and you know that it can be demanding if you go and sell it in the market. But to start selling, you must have some basic infrastructure, facilities, brand name, product, and many other things which of course need money to have all this. Let us assume that any basic start-up needs 100 Rs to start but you have only 20 Rs, So what to do for the rest 80 Rs?
There are two ways by which you can raise money or fund for your business and those are Debt and equity. That means either you can borrow money from Bank or you can take it from friends or the general public. If you choose the First option and you go to the bank and ask for a loan, the bank will lend you money but the bank needs something for assurance. If you had anything to keep with the bank as a reserve, what was the need to go to the bank? You could have borrowed money against that property from the open market itself.
The second option is your friends know your skill and they are well off in finance and ready to invest money in your skills. Because they know the potential and value of your skill. So if you proceed with the second option and your friends gave you money. In that case, they will be shareholders of the profit as well. Once, your business kicked off and making handsome profits, the profit of you and your friends will increase accordingly. That’s how the market operates in general.
How the stock market functions
Now if you want to expand your business to expand your profit so you have to raise funds for that. So again you can go through the same procedure or this time you can list the company in the stock market. Here Listing means, you want to raise funds for your business by inviting the public to be a part of your business. Now all the shares which were initially with you and your friends will be separated into a large number of small shares at face value and will be made public to let the public buy shares. The interested investors among the public will buy those shares at their market value and the market keeps on functioning.
Once you collected the amount from the public through shares, you will be out from the stock market and the price of the share of your company will fluctuate as per the performance of your company. In the same way, the public will get their dues according to the prevailing share price in the stock market. But the big question is that we can not sell our shares openly in the market so where and how to search for the person interested in buying your shares? Here the concept of the stock market comes in and we will discuss it in detail.
What is Stock Exchange
Stock Exchange is a place where the company goes to trade and it is a place where all types of securities are bought and sold frequently. You will find all other companies listed and it is strictly controlled by the rules under SEBI (Security Exchange Board of India). People generally meet here to buy and sell the shares of any company online, and here you also find a suitable investor in the same fashion but your company must be listed in it prior. So you get investors and your business is growing.
And as an investor, if after one year, you think of selling the shares then you will get a price per share. Here the number of shares of a company is multiplied by the price of one share, so if 200 shares and each has a value of 1000 at the current time then the market cap of the company is 200 x 1000 = 200000.
Ultimately you got profit but one thing here is that Shares founds their high value, not because of any black magic but because investors have invested in them. So that means Stocks are not gambling in any way, but people suffer loss in it just because of their own mistakes by not following the proper guidelines and rules.
What is Sock Exchange Index
Stock exchange Index is a term used that shows the change in the price of something (Commodity) when u compare it with its price in the past. That means it is a percentage change in its value as compared with the base parameter. Now as already discussed that Stock exchange is a place where many companies are listed and the Price of one index goes down while for others it may go up. Sensex is made up of the 30 most reputed companies that are listed on the stock exchange.
The index will keep monitoring the Large Cap Companies and as Large Cap companies are more stable, well matures in the market so they will have reliably stable returns with minimal risk associated with them.
BSE (Bombay Stock Exchange) and Index
BSE stands for Bombay Stock Exchange and it is made up of companies that represent the sector they operate in i.e Index is nothing but a group of companies operating in a particular sector. These are the companies most traded on the stock market. On average, Index going down and up are taken into consideration, and if the average index price goes above the base value that is said to be the index rising.
is another such index that is a group of companies and so it also records and keeps tracking market health. So India has 2 large exchanges BSE & NSE and both have different indices, and these are also called large-cap indices. To be included in the top 30 stock Sensex, any company must have a large market Capitalization. These Large-cap companies are mature, established firmly in the market, and known for giving dividends rather than rapid growth.
It will track firms of Mid Cap companies which are having lower capitalization than Large Cap firms and fewer shares to trade with as compared to Large firms. So growth and fall can be sharp here which means the return is also good but the risk is also associated with it.
Small Cap Index
It will track firms that are even smaller and have few shares to trade off so these types of firms have maximum returns with maximum risks along with means highly volatile.
BankEx is another index dedicated to tracking the performance of the banking sector regularly. If you want to invest with any banking-related institution, then this index must be regularly monitored by you.
Why Equity Investment?
Now the most important question to ask is why do we have a need for stock equity Exposure for our wealth creation? and the answer to this question is a simple example, Suppose you invested Rs 01 Lakh in Asset class i.e ( FD, Gold, PPF, and Equity or Stocks) in 1980 and left for compounded value. So can you imagine what is the present value of those investments now… Let’s take a look… The value of FD becomes 19.35 lakh, 16.10 Lakh in Gold, 32.78 in PPF, and whopping 2.3 crores in Sensex. ( values based on the available study and data and are subjected to change in future)
FD always have very minimal return because it can not beat purchasing power due to the effect of Inflation, PPF performed well because of High-Interest Rate as compared to FDs.
⇛⇛ So keep in mind always while investing in Stocks that you will get good returns when you stay invested for a minimum of 07 Years. As the market volatility reduces and you can look for a return up to 14 to 15 %. Now when we compare Equity/ stocks with Real Estate Business then maximum people raise their hands in support of Real Estate, but you must know that Real Estate has higher costs and lower returns than Equity.
Remember that, you have created an Emergency fund and bought essential insurance for yourself prior to investment in equity. So what is the best way to get exposure to equity if you are a beginner then, I must say …..Mutual Fund, which is discussed in my other blog. But mind it, mutual funds and direct investment in the market through equity are entirely different subjects.
So Be with me …..keep Investing….. and be ready to enjoy the Future
SEBI (Security Exchange Board of India)
SEBI defines a company as a large-cap that features within the first 100 companies by market capitalization on the stock market, Midcap from No. 101 to 250, and Small Cap 251 and below. But in general, one other definition is being followed for Companies to be categorized as Large-cap which has a Market Capitalization of more than 10,000 Crore, Mid Cap companies have a Market Capitalization of 2500 to 10,000 Crore. While Small-Cap companies have their Market Capitalization below 2500 Crore. All other information related to the shares and companies operating in the market can be viewed by visiting the official website of SEBI.