What should people in their 20s know about the wealth creation from the stock market?

Imagine your parents had invested rupees 1 lakh when you were born in 1992. Then they were busy in your upbringing, education, and managing own career. They forgot about the shares. Last year when you completed your studies and got the first job they found the share certificates of the investments made in 1992.

Out of the curiosity, they checked the share price of their holding which is included bonus shares received during last 25 years.

They were overjoyed to know the present value of the shares. They just decided to retire and pursue their life dream to go on a world tour.

Can you guess what the present value of the shares was?

Rupees twenty-five crores!! Yes, rupees 1 lakh in 1992 had become rupees 25 crores in 2018.

This could have been a true story had anyone invested in the IPO of Kotak Mahindra Bank in 1992. This could have been a true story had anyone invested in the IPO of Infosys in 1993. (& not sold the shares till date).

This is the kind of wealth one can create in the stock market. But this was possible because the shares were not sold for 25 years. This was perhaps not possible had, they knew about the shares. The temptation to sell at some meagre profit makes us sell the shares which could be a potential wealth creator.

People learn from own experience or from someone else’s experience. At a young age, knowing the fundamentals of investing based on others’ experience would be very valuable.

There are three fundamental lessons every investor must keep in mind when investing in the stock market.

· Be an investor, not a trader:

Yes, trading is a full-time business. As an investor trying to become a trader is very risky. No one can time the market. No one has any control over the stock prices. The market is impacted by various national and international factors. Short-term trading could be a loss-making proposition. Speculation could be extremely dangerous. Therefore resist the temptation of earning quick money. Invest but do not trade if you are not a full-time trader and never speculate.

· Stay committed for the long-term:

Many times we feel happy by making a short-term gain. Short term gain deprives investors of creating wealth over the long term. Imagine rupees one lac shares of Kotak Bank sold for rupees two lacs. It also has huge cost i.e. brokerage of entry and exit and tax on the gain. Do not feel happy by making a short-term gain. History suggests wealth is created by the long-term investment. Invest in solid stocks and stay committed for years.

· No not diversify too much:

Another bad habit of investor is investing in too many stocks. Most investors divide their portfolio too thinly. Every time they invest they invest in different stocks.

“The best stock to buy is the one you already own.” Peter Lynch

Add good stock to your portfolio. It is better to have larger quantities of few good companies’ shares than to have few stocks of a large number of companies.

Resist the temptation of having too many companies in your portfolio. Resist the temptation of investing in penny stocks. Keep on adding more quantities of shares of good performing companies.

Why stock investing is not for everyone?

One thing is sure; the stock market is not for the undisciplined and impatient investor. Discipline and patience can help you make your fortune. Your indiscipline and impatience could ruin your fortune. It could be a risky investment option. Your investment could become zero.

Warren Buffett says, “Risk comes from not knowing what you are doing.”

Don’t do what you don’t understand. Those who think the stock market is not their cup of tea, mutual funds are another option to reap the benefit of the stock market. Mutual fund managers’ use their acumen and sophisticated software for analysis, which is better than depending on own gut feeling or tips from the people.

There are insurance products which take care of your life insurance risk and also invest in stocks. This is a mix of life insurance and mutual fund.

The crux of smart investing is to;

• Know your objectives of investments – Long-term/short term and safe/moderate risk/ high risk
• Understand the risk you wish to cover – Life insurance / Mutual Funds (Non equity linked)
• The risk you wish to keep open – Equity investments/ Equity linked mutual funds
• Finally, know the pros and cons of investment products before investing. – Tax benefits lock in period/ Tax implication on maturity etc.

As a young investor, keep the above rules in mind. Learn from the experience of the others and create wealth.

“It is impossible to produce superior performance unless you do something different from the majority.” John Templeton

We would like to know your experience and views about investing and wealth creation.

 

Aastha Mestry - Portfolio Manager          

An Author and a Full-Time Portfolio Manager, Aastha has 6 years of experience working in the Insurance Industry with businesses globally. With a profound interest in traveling, Aastha also loves to blog in her free time.