SHARE MARKET
STOCK INVESTMENT
How to invest in the stock market in India is often the question I listen to from the young buddies. The obvious next question is how to invest successfully for the beginners. A few decades ago, no one ever dreams of entering the share market. It was considered the gambling market for the tips earners and often, the reckless punters and risk takers. It was deemed more of a lottery than a route for investment. They are of the impression that such investments need huge amounts of money and a systematic investment plan means putting savings each month little by little in the Mutual Fund. None dares explore the way to invest directly into stocks. Let’s explore the dynamics of directly stock investing from a deeper perspective.
The first thought one must discard is how to invest in stocks and make money. It’s not the route to a gambler’s success. Share market is the place where money flows from the impatient to the patient-Warren Buffet. Ironically, barely 1% makes money while the rest 99% do not have the patience. Patience is subject to a particular stream of studies pertaining to human psychology and human psychology is an embedded quality in the common man. Everyone wants a quick way to success and eventually ends up in disappointment.
There comes the importance of the Mutual funds. Mutual fund calculators will tell you a much higher return over a large period of time. Many will go for the mutual funds.
Why is mutual fund important?
There are many reasons behind it. First reason is financial illiteracy. Educational institutes and learning curricula do not educate the young minds on the methods of investment leaving all of them blind of the investment routes.
Inflation erodes savings. To counter this, either you directly invest in the active business and obtain profits far exceeding the inflation rates thereby increasing actual returns. Second route is through the secondary market which is the other name of the stock market. Here, an exchange is instituted to float the shares for fast exchange of the stocks contributing to the volatility of the shares. In direct investments, you have to be involved in day to day operations of the business and the profit will be divided among the shareholders. In this case the shares are not floated and it's a private organisation. When such an organisation tries to scale up the business, it needs money which it borrows from the Angel Investors. If the amount is past several hundreds of crores, Venture Capitalists will step in. If the investments exceed thousands of crores, Merchant Bankers will lend the money. Against the collateral mortgage of the promoter’s (Owner’s) shares or by the way of directly and privately buying their shares in a very chunk, they will lend the money. They earn in this way from the profit distribution (Dividend) and sale of the shares through offer for sale. But, they incur the highest risk. Out of many such investments, only a few give them profits manifold.
When the company grows big and there arises the need to collect money from the public in general, the company goes public, that is, it enters into the secondary (Share/Stock) market. Common men then flock around it and start buying/selling its shares. It gets the opportunity to scale higher by showing its performance and gaining inventors’ confidence over decades of stellar performance.
For an ordinary investor to buy its requires understanding its business model, profits, investments, finances, plan for new expansions and projects, risks the company is incurring, future demand of the product/services etc. Here comes his dependence on the ace fund managers. These fund managers are the trained people to read the balance sheets, annual reports, make inquiries on the companies’ activities and analyse the accounts forensically. They are also trained to time the market as far as possible and make entry and exits thereby getting profits for their clients. Thus the clients cum investors get 10-20% returns far exceeding the inflation erosion.
Why is it not prudent to depend solely on the Fund managers?
Fund managers are often under pressure to maximise the profit quarterly and attract more investors. The more the investments, the more is the quantum of money. They sometimes make wrong decisions incurring ordinary profits. An ordinary investor does not have direct control over his selection of shares or timings of entry or exit. That’s a flaw. Secondly, honesty is and integrity is a moot point here. Often operators and investment cartels take help of a few dishonest fund managers to inflate prices or short sell certain shares which may not call for prudent investment.
Who must depend on the Mutual Funds?
Those who have a dearth of time to do self research and studies on the companies financials in depth may opt for it. Those who are too naive to churn out the financials and do not have the training to convincingly find a company or get the premonition to exit in time may rather depend on the fund managers.
Any Safest way to bet on a selected few companies on a long term basis?
Go to the Nifty Fifty companies list. Open their last 20 years chart and see which among them display constant growth. Select 20 and do not invest more than 5% in any one of them and sleep tight. 12-20% Compounded Annual Growth Return (CAGR) over 10 years is possible beating bank returns. In this way you do not have to depend on any third party for the investment advise and be free to make your call in a disciplined systematic manner.
Which companies’ Stocks should I pick for long term investment and sound profits?
A million dollar question indeed. You have to read through other articles of mine to see which companies I’m invested in and the rationale behind them. Happy investing !!!
[By profession this author is a 38 years' experienced private tutor. Visit www.dbhattacharjee.com to know more.
He directly invests in Share market too.
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