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Benefits of Stock Market Investing that Every Investor Need to Know

Benefits of Stock Market Investing that Every Investor Need to Know

Benefits of Stock Market Investing that Every Investor Need to Know

"Stock market is not for us...." 

"We'd better invest in Gold...." 

"We can't take such risks with our money...." 

  

These are some of the lines most of us must have heard our parents say whenever stock market investment is discussed in our households. However, in the last few years the trend of investing in stocks has seen a considerable rise and the stereotypes around stock market gambling are breaking. Though there is a long way to go as till 2023 only 3% of the Indian population invested in stock market.  

Stock market investment is the need of the hour in today's time when skyrocketing inflation is making affordability difficult for normal people and traditional investment avenues like Gold and FDs are not beating the overall inflation.  

In these times the stock market is not only beating inflation, if done with the right strategy, discipline and in the upcoming flourishing top sectors then it can also help you generate substantial wealth that could change your fortunes.  

 

 

Major benefits of stock market investing 

In this blog we'll highlight and emphasize on some of the key benefits of investing in the stock market: 

 

1) Compounding 

As Albert Einstein once said, "Compound interest is the eighth wonder of the world. He who understands it, earns it...he who doesn't...pays it." World's renowned stock investor Warren Buffet also substantiated this view as he used the power of compounding to generate enormous wealth in the stock market over a long term.  

Compounding is basically the act of earning interest on interest i.e. you not only earn returns on your initial investment but also on what you accumulate over time. To leverage the impact of compounding it's always wise to start early as time plays a crucial role. Staying invested for a considerable time not only helps you generate enormous wealth but also lowers the risk profile of your portfolio. 

For example- If you had invested INR 10,000/monthly and got a decent annual return of 12% then after 20 years your 24-lakh investment will grow to approximately 1 crore. 

 

2) Weapon against inflation 

Over time the purchasing power of money decreases, which results in a rise in the cost of everything around you. This phenomenon of the gradual decline in the purchasing power of your money is called inflation.  

Therefore, investing in avenues that beat inflation is necessary to generate wealth in the long run otherwise over time if your returns are lower than inflation then your returns will be nullified.  

For example- if generals FD rates linger between 6-7% in India and if the inflation also remains the same during the same time period of your FD, then in this case your returns will be nullified.  

That's why it is always advisable to invest in the stock market as Nifty50 has provided returns of 10.5% CAGR in the last 10 years, which has handsomely beat the 5.5% average inflation rate in the country during the same time frame. 

 

3) Diversification benefits 

You must have heard the phrase "dont put all your eggs in one basket" and it holds true in the case of stock market too. The stock market offers a diverse range of asset classes such as equities, bonds, derivatives and mutual funds.  

It is not advisable to put all your investments in a single asset class as it increases the risk profile in volatile markets or slows down the growth of your portfolio in case of bull run in one asset class while you have invested in another asset class.  

For example- if you put all your money on one equity stock then it could lead to the erosion of your wealth in case the company's growth takes a hit, and its share price tanks. On the contrary, if you invest only in mutual funds, then you could miss out on the exceptional rise in the prices of equities as they tend to grow faster than mutual funds.  

Therefore, to maintain a balance it's always better to diversify your investment over a variety of asset classes to gain the benefits of all asset classes and save your portfolio from the risks posed by market dynamics. 

 

4) Leverage from country’s economic growth 

When a country’s economy grows with time, its stock market also rises and those who stay invested during this time benefit from the rise. The gains are even greater in the case of developing countries, where the economy grows at a faster pace than those of already developed countries. 

India is on the path of development and is expected to maintain its decent growth rate despite tumultuous global economic conditions. Therefore, it presents a great opportunity for investors to invest in the growth of India and make good returns over a considerable time. 

 

5) High liquidity 

Liquidity of an asset refers to the ability to turn the assets into cash and cash equivalents. Stocks and other financial asset classes of the stock market have high liquidity in comparison to other asset classes like real estate and long-term debt instruments.  

Higher liquidity means that you can buy and sell these financial assets quickly without much hassle. Also, the digitised and transparent system of the stock market ensures that the buying and selling process is carried out smoothly. 

 

6) Ownership and Voting rights 

Investing in stocks of a company not only gives you the potential to earn good money but also gives you part ownership of the company in proportion to the shares bought by you. When you become a part owner of the company it also gives you voting rights in important decisions of the company and giving their approvals before going forward with them. These powers bestowed to the voters also help them in influencing the governance and direction of the company. 

 

Final Thoughts 

The stock market affords long-term financial growth, but inbuilt risks accompany it. Some investors have limited risk tolerance, while others seek investments promising higher returns, and riskier investments with no regard to the value of capital. Thus, a good investment strategy is one that satisfies your specific appetite for risk while avoiding impulsive and emotionally induced decisions that threaten your financial plan. 

 

 

 

  

 

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