You might have heard about people making a lot of money in the stock market. Conversely, you might have also heard about people losing a lot of money in the stock market. If you do it the right way, investing in stocks is one of the best ways to make money.
Here’s why you should invest in stocks – To make money.
Who doesn’t like making money, right?
But you might say that you are making enough money from your job or that you have enough saved up in the bank. Why bother investing in stocks?
Let me tell you something – You can never make more money by keeping it in the bank. To be honest, you will not be saving your money. In fact, you will be decreasing your purchasing power by putting it in the bank. It’s due to inflation (which I will be discussing later).
If you are new to stocks and the stock market, read – Stock Market 101 – How to Start Investing in the Stock Market?
There are two main ways through which you can make money in stocks.
- Capital Gain
Capital gain is the profit you earn by selling a stock at a higher price. Simply explained – suppose you bought a stock at Rs. 250 per unit, and after a few months you sold the stock at Rs. 400 per unit. You made a profit of Rs. 150 per unit (Rs. 400 – Rs. 250) in that particular stock. Your capital gain is Rs. 150 per unit.
So, if you had bought 100 units of the stock, here’s the simple math:
Bought at Rs. 250 * 100 = Rs. 25,000
Sold at Rs. 400 * 100 = Rs. 40,000
Capital Gain = Rs. 40,000 – Rs. 25,000 = Rs. 15,000
Dividends are a portion of a company’s earnings distributed to its stockholders. When you buy stocks, you are actually buying a small portion of a company. When the company makes a profit, it distributes a portion of the profit to the stockholders in the form of dividends. In the case of Nepal, dividends can be received in two forms – cash dividend and bonus shares.
Why Invest in Stocks?
I know I have answered it already – to make money. But, let’s go a little deeper here.
Investing in stocks not only helps you make money through capital gains and dividends but it is also one of the best ways of utilizing your money to stay ahead of inflation. Investing money in stocks is way better than keeping your money in the bank. Why? Because of inflation. Explained in simple terms, inflation is the purchasing power of a single unit of currency.
You might have heard your grandparents say, “In our days, a pair of shoes used to cost only Rs. 20.”
Gone are those days. Now, a pair of shoes cost way more than it used to 60-70 years ago. How did that happen? Because of inflation.
Staying ahead of Inflation
Now that the concept of inflation has been clarified, let’s see how investing in stocks helps you beat inflation. Currently, the annual inflation rate in Nepal is around 6%, which means the price of a product will increase by around 6% in the next year.
As of writing this article, the banks provide an interest rate of around 4% in a savings account (around 8% in fixed deposit). So, if you keep your money in the bank, you are going to get only a 4% return annually in your savings.
This means that if you put your money in the savings account, you are actually losing the purchasing power of your money by 2% (6% – 4%).
Now, if you invest in the stock market, where you can get around 10% return on your investment (or even more), your purchasing power has increased by 4% (10% – 6%). You are still making 2% more in stocks if you had invested in a fixed deposit (10% – 8%). This is how you can stay ahead of inflation and increase your purchasing power if you invest in stocks instead of putting your money in the bank.
You’ve now understood about capital gains and dividends. Dividends are distributed by the company, so there’s not much you can do about it. But, what about capital gains? How much gain can you expect if you invest in stocks?
To explain this, let’s look at the history of the stock market of Nepal.
Nepal has only one stock market – Nepal Stock Exchange (NEPSE). You can learn more about NEPSE here.
Disclosure: This is not a prediction or projection of the performance of an investment strategy. This is merely the historical performance of the NEPSE index and it does not guarantee future results. DO NOT take this as an investment recommendation.
The history of the stock market clearly shows that, in the long run, the market tends to move upwards. So it is almost certain that you will be making money if you invest in stocks and hold it for a longer period of time. As Warren Buffett says;
The best time to buy is whenever you have money; and the best time to sell is never.
This means that the longer you hold your stocks, the more likely that you will make money.
Easy to Invest In
Unlike investing in real estate or starting a business, investing in stocks is fairly easy. You do not require a large sum of money to invest in stocks. For starters, you can invest a small portion (about 10%) of your monthly income in stocks.
To invest in stocks, simply open a Demat account and a trading account with a stockbroker. Then you are ready to go. Learn more about how to start investing in the stock market here.
You must, however, do some research and take advice from someone who knows how the market works. Do not just randomly select a company to buy stocks. Study the market and have some basic understanding of companies and investing philosophies.
Stocks are also very liquid, which means you can easily sell them and quickly receive cash whenever you are in need.
A Few Things to Consider
I’ve mentioned the four major benefits of investing in stocks.
- To make money
- Staying ahead of inflation
- Stock Returns
- Easy to invest in
Now, before you go ahead and start finding stocks to invest in, you must consider a few things that might help you.
Save to Invest
As I said earlier, save at least 10% of your monthly income to invest in stocks. Stop eating out every day. Also, stop eating and drinking at expensive restaurants and cafes. Trust me, it is going to save you a lot of money. If you are a smoker, think about how much you spend on cigarettes each month. Do the math. You don’t have to run to the stores every time you see “on-sale” signs. Look inside your closet. There already is a lot of stuff you don’t need. Sell the old stuff that you have lying around, unused, at your house. These tips might seem small, but they can actually help you save a lot of money.
Don’t put all your eggs in one basket. This is a famous sentence in the world of investment. You don’t want to invest everything in a single stock. Learn to diversify your investments. Diversification minimizes your overall risk, especially if you are a newbie. Invest in multiple sectors so that if one sector fails, other sectors will be there to compensate.
Invest in Stock-Alternatives
The capital market is not only about stocks. There are debentures, bonds, mutual funds, index funds, and so forth. Debentures will provide you a steady rate of return on your investment in the form of interests. Mutual funds can provide good returns as they are usually diversified and are managed by professional investment bankers. Bonds and index funds have not been started yet in Nepal. But, these are also good alternatives to stocks.
We have already seen that in the long run, the market will grow. Here’s a 90-year historical chart of the famous S&P 500 Index of the US.
This also proves that markets move upward in the long run. If you apply a long-term strategy while making your investments, you are most likely to make more money. Warren Buffett is a perfect example of a long term investor.
Warren Buffet’s net worth increased drastically as he got older. It is not because he certainly started making more money in his old age. It is because, when he was young, he had invested his money in stocks and businesses that provided him handsome returns as the years passed by. He compounded his money through his long-term investment strategy and became one of the richest person in the world.
Here’s another famous quote by Mr. Buffett;
The stock market is a device for transferring money from the impatient to the patient.
If you want to become rich quick, then investing in stocks is not for you. You have to be patient to see your money grow. It takes time, but growth is certain. You have to not let your emotions and feelings drive your investment decisions. Don’t be stressed if the market is down. History has proven again and again that recessions and market-crashes come and go. Be patient.
Learn as much as Possible
The more you learn, the more you will earn. Investing is a continuous learning process. There is no course or book that can make you an expert overnight. You have to learn it practically. Yes, your knowledge will definitely get enhanced by taking courses and reading books, but it will not make you money until you actually invest in the market. Don’t be afraid to make mistakes. Making mistakes and learning from those mistakes will teach you to make wise investment decisions in the future.
People have different choices and priorities in life. Everyone is different. They have different career-paths and likes/dislikes. Investing might not be for everybody. But, I think everyone should invest at least some portion of their wealth in stocks or other assets. The rich invest in assets.
Some people make money, some lose money. If you make wise investment decisions, you might never lose money in the stock market. It is a great place to increase your wealth. All you need is determination and a little financial knowledge.
Disclaimer: Please do not take this article as an investment recommendation for any individual. This article is for educational and informational purposes only. I am by no means an expert in investing. I wrote this article on the basis of my knowledge, experience, and research on the topic. Use this information at your own risk.