The Basics Of Stock Market

Lesson -> The Basics Of Stock Market

1.1 Why you should invest?

Let's first look at the question. Let's say you make Rs.50,000 per month and spend Rs.30,000 on your living expenses. This includes food, housing, transportation, shopping, medical, etc. Your monthly surplus is Rs.20,000/-. We will not discuss the personal income tax because it is too complicated.

Let's make some assumptions to help us get the point across.

  1. Your employer will give you a 10% increase in your salary each year.
  2. The cost of living will likely rise by 8% annually.
  3. You're 30 years old, and you plan to retire at age 50. You have 20 years left to work.
  4. After you retire, you don't plan to continue working.
  5. All expenses are set and you don't anticipate any additional expense.
  6. Hard cash is used to retain the balance cash of Rs.20,000/month.

These assumptions are what will make the cash balance look in 20 years.

YearsYearly IncomeYearly ExpenseCash Retained 
  Total Income17890693 

These numbers are scary. The above calculations reveal a few things that are very startling.

  1. You have earned Rs.1.7Crs. after 20 years of hard labor.
  2. Your lifestyle is the same as it was when you were young. You may have even suppressed your long-held dreams of a better home or a better car.
  3. Assuming that expenses continue to rise at 8% after you retire, Rs.1.7Crs will be enough to get you through approximately 8 years of your post-retirement life. You will find yourself in a tight spot after the 8th year, with no savings to support you.

What would you do if you ran out of money after 8 years? How can you finance your life? Is it possible to collect more money at the end of 20 years?

Let's take another example. Instead of keeping cash idle, you decide to invest it in an investment option that increases at 12% per year. As an example, if you keep Rs.240,000 in the first year, the 20-year-old investment yields Rs.2,067.063/- at 20 years.

YearsYearly IncomeYearly ExpenseCash RetainedRetained Cash Invested @12%


   Total Cash After 20 Years42695771

Your cash balance has increased dramatically after you made the decision to invest surplus cash. From Rs.1.7Crs, the cash balance has risen to Rs.4.26Crs. This is an astonishing 2.4x increase in the cash balance from Rs.1.7Crs. This means you will be able to manage your post-retirement life in a better way.
Let's return to the original question: Why invest? There are many compelling reasons to invest.

  1. Fighting Inflation – By investing, one can better deal with the inevitable - the rising cost of living. Generally referred to as inflation
  2. You can create wealth by investing. After the expiration of the time period.The time frame in the example above was until retirement. However, it could be any other thing - children's education or marriage, purchase of a house, retirement holidays, etc.
  3. To achieve your financial goals

1.2 Where can you invest?

After determining the reasons for investing, the next question is: Where should one invest and what returns can one expect from investing?

When it comes to investing, you have to make the right choice Asset class This suits the individual's risk-taking and return personality.

An asset class refers to a type of investment that has particular risk and returns characteristics. Here are some examples of popular asset classes.

  1. Fixed income instruments
  2. Equity
  3. Real estate
  4. Commodities (precious metals)

Fixed Income Instruments

These instruments are highly investable and pose minimal risk to the principal. The return is paid to the investor as interest based on the specific fixed-income instrument. You could receive interest at quarterly, semi-annual, or annual intervals. The capital is returned to the investor at the end of the maturity period, also known as the term of deposit.

A typical fixed income investment would include:

  1. Banks offer fixed deposits.
  2. Government of India Bonds
  3. Bonds issued in Government-related agencies like HUDCO, NHAI etc
  4. Corporate bonds

The typical return on a fixed income instrument is between 8% to 11% as of June 2014.


Investing in Equities means buying shares in publicly traded companies. These shares can be traded on the Bombay Stock Exchange, (BSE) and the National Stock Exchange, (NSE).

An investor can't guarantee capital if they invest in equity. As a trade-off however, equity investments can yield handsome returns. Over the past 15 year, Indian Equities has generated returns of close to 14%- 15% CAGR (compound annually growth rate).

Over 20% compound annual growth rate has been achieved by investing in well-run Indian companies over the long-term. It takes patience, skill, and hard work to identify such investment opportunities.

If equity investments are held longer than 365 days, the tax rate is 10%. This applies to gains greater than Rs 1 lakh as of 1 April 2018. This tax rate comparing to others is low.

Real Estate

Real Estate Investment is the purchase and sale of commercial or non-commercial land. Examples of real estate investments include sites, apartments, and commercial buildings. Two income streams from real estate investments are available: Rental income and capital appreciation.

Transactions can be complex and require legal verification of documents. Real estate investments often require large cash outlays. Real estate returns are not measured by any official metric. It would therefore be difficult to comment.

Bullion - Commodity

Investing in silver and gold is a popular way to invest. Over a long time, silver and gold have appreciated. These metals have a compound annual growth rate (CAGR) of around 8% over the past 20 years. You have many options for investing in silver and gold. You can invest in jewellery or Exchange Traded Funds.

It would be interesting to compare the amount one could have saved if he invested the surplus cash to the original example. He can invest in equity, fixed income, or bullion.

  1. The corpus would have grown to Rs.3.3Crs if it was invested in fixed income at a rate of 9% per year.
  2. The corpus would have grown by Rs.5.4Crs if it was invested in equities at a rate of 15% per year.
  3. If you invested in bullion at a rate of 8% per year, your corpus would have grown up to Rs.3.09Crs.

Equity investments tend to provide the highest returns, especially if you have a long-term investment plan.

Note on investments

A strong mix of assets is key to investing optimally. Diversifying your investments among different asset classes is a smart move. "Asset allocation" is a way to allocate money among different asset classes.

A young professional might be more willing to take on greater risk due to his experience and the years of investment he has. Generally, investors should invest 70% in equity, 20% in precious metals and the remainder in fixed income investments.

A retired person could also invest 80 percent of his savings in fixed income, 10% in equity markets, and 10% in precious metals. The investor's risk appetite will determine the proportion of investments allocated across asset classes.

1.3 What should you know before you invest?

Although investing is an excellent option, it is important to know the following:

  1. Both risk and return go hand in hand. Higher risk equals higher return. The return is lower if the risk is higher.
  2. Fixed income investment is a great option if your principal amount is not at risk. This investment is less risky. You run the risk of losing your money if you adjust the inflation return. For example, a fixed deposit that gives you 9% inflation at 10% will result in a loss of 1% per year. Fixed-income investments are best for investors who are extremely risk-averse.
  3. It is possible to invest in Equities. It has been proven to beat inflation for a long time. Equity investment has historically yielded returns of between 14-15%. Equity investments can be risky.
  4. Real estate investment is expensive and can't be done with small amounts of money. Real estate investments are subject to liquidity. You cannot sell or buy property at any time. It is important to wait until the right time and right seller or buyer are available to transact with your property.
  5. While gold and silver are safer than other investments, the historical return has not been encouraging.

To Summerize

  1. Invest in your future
  2. The return rate of investment will affect the amount of corpus that you are able to build over the period. A small change in the rate can have a significant impact on the corpus.
  3. Select the instrument that suits you best in terms of risk and return.
  4. If you want to beat inflation over the long-term, the equity should be part of your investment.