Investing in company stocks via the Share Market in India is one of the best ways to grow your money.
It’s also one of the worst ways to lose money if you pick the wrong stocks or the wrong time.
So how does one go about taking advantage of opportunities in the Equity asset class. Before you invest in the stock market, you should first understand the risks associated with it.
The Risk of Losing your entire savings or a significant part of it.
Let’s say you buy 100 stocks of company A at Rs 100 per share at an investment of Rs 10,000. If the share price goes down to Rs 50, your stocks will be worth Rs 5000.
Notional Loss: Your notional or paper loss is now Rs 5000. What this means is that while you still 100 shares, they are just worth half of what you paid for them. If you continue to hold them, the prices may rise and you might again be worth Rs 10,000 or more.
Real Loss: At this point, most folks panic and sell their shares. The reason in their head, “I have already lost 50% of my money. Let me sell it and get atleast 50% back before I lose more” The moment you sell your shares, your notional loss turns into a real loss and you can’t recover your money.
This is why stocks are classified as a Risky asset class.
Now let’s look at a brighter scenario.
Let’s say you buy 100 stocks of company B at Rs 100 per share at an investment of Rs 10,000. If the share price goes up to Rs 150, your stocks will be worth Rs 15000.
Notional Profit: Your notional or paper profit is now Rs 5000. What this means is that while you still have 100 shares, they are now worth much more than what you paid for them. If you continue to hold them, the prices may rise further and you might gain more.
Real Profit: At this point, most folks feel happy and sell their shares. The reason in their head, “I have already gained 50% of my money. Let me sell it and get atleast 50% back before I lose the gains” The moment you sell your shares, your notional profit turns into a real profit.
No other asset class (apart from Property in selected areas) provides these kinds of returns which is why they are so popular.
Most folks have these questions:
- What stocks should I buy ?
- How do I decide, how to choose which stocks to buy ?
- When is the right time to invest in the share market ?
- How much money should I invest ?
- How long should I hold my stocks and When should I sell them ?
- etc etc
Unfortunately, there is no single or best answer because of another factor called Volatility.
What is Volatility ?
Take a look at the picture below. It shows how the share market has risen and fallen in value since the year 1991.
Those who bought shares when the market was at the green triangles and sold at the red triangles lost money.
Those who bought shares when the market was at the red triangles and sold at the green triangles made money.
So you might ask, If there is so much uncertainty, how do I decide when to invest and when to sell.
Before we get to that, there is a third category of People who made money.
The category of people who bought good quality stocks and held them through market ups and downs over a long term period made money.
Let’s say someone had invested Rs 1000 in the BSE Sensex Index in the year 1991. Over the years, his portfolio value would have gone up and down and up and down. However, if he had continued to hold it, today it will be worth approximately Rs 30,000. Over the last 30 years, the stock market has delivered an annualized return of ~16.9% or the equivalent of doubling your money every 6 years.
So coming back to the question “How do I decide when to invest and when to sell”
Our recommendation: Don’t do it on your own initially.
Unless you are willing to put in a significant effort into learning the principles of Value Investing, researching companies and have access to detailed information, we don’t recommend you invest in stocks directly.
Most folks aren’t willing to put in the effort and instead rely on stock tips from TV experts or online magazines and think they are equipped to manage their own portfolio.
Instead, you can invest in the stock market through mutual funds.
Mutual Funds pool in money from multiple investors and manage and grow your money in a professional manner. The good ones also usually beat the BSE Sensex and the Top 10 mutual funds have a given a return of >25% in the last 5 years.
Again, not all Mutual Funds are built equally. They can also destroy your wealth. Take a look at the 10 worst performing mutual funds.
So if stocks are risky and mutual funds are risky, how do I decide where to invest my money.
By investing small amounts of money every month via Systematic Investment Plan or SIP in good quality mutual funds. If you invest in a balanced way based on your risk profile, you can significantly grow your money.
That’s also where we help you at Finqa to decide how much and where you should invest your money based on your personal goals and needs.