When it comes to investing, we want our money to grow with the highest rates of return, and the lowest risk possible. While there are no shortcuts to getting rich, there are smart ways to go about it.”
An equity investment is money that is invested in a company by purchasing shares of that company in the stock market. These shares are typically traded on a stock exchange.
Why should I consider equities?
Equity investors purchase shares of a company with the expectation that they’ll rise in value in the form of capital gains, and/or generate capital dividends.
The primary objective of investing is to ensure that every person is able to meet his or her future financial objectives.
Rise in inflation makes it inadequate for individuals to simply earn and save some part of their incomes.
The stock market is one of the oldest and most popular investment avenues due to several benefits of investing in stocks.
Let us understand the benefit in investing in equity or we say stocks
Benefits of Investing in Stocks
- Higher Liquidity.
- Versatility.
- Higher Returns in Shorter Periods of Time.
- Acquire Ownership and Right to Vote.
- Regulatory Environment and Framework.
- Convenience.
Higher Liquidity:
It provides higher liquidity to investors because average daily volumes are high. Therefore, if an investor wants to buy or sell any product on the stock exchanges, this liquidity makes it easy.
Versatility:
The stock market offers different financial instruments, such as shares, bonds, mutual funds, and derivatives.
In addition to providing investment choices, this flexibility is beneficial in mitigating the risks inherent to stock investing by enabling diversification of investment portfolios.
Higher Returns in Shorter Periods of Time:
Compared to other investment products like bonds and fixed deposits, stock investing provides investors an excellent possibility of making greater returns in comparatively shorter time periods.
Doing the research and due diligence, and being patient can significantly mitigate the risks inherent to stock investing and maximize the returns on share market investments.
Acquire Ownership and Right to Vote:
Even if an investor acquires a single share in a company, he acquires a portion of ownership in the company.
This ownership, in turn, provides investors the right to vote and offer his contribution in the strategic movement of the business.
Regulatory Environment and Framework:
The Indian stock market is regulated by the Stock Exchange Board of India (SEBI).
The SEBI has the responsibility of regulating the stock exchanges, its development, and protecting the rights of the investors.
Convenience:
Technical development has influenced every aspect of modern living.
The stock exchanges are also using various technical advancements to provide greater convenience to the investors.
The trades are all executed on an electronic platform to ensure the best investment opportunities to investors in an open environment.
Beating Inflations
In the long run equity is an asset class that manages to beat inflation and earn positive returns
The biggest challenge facing any form of investment is to beat inflation (or rising prices) in the long run as value of money will depreciate over time.
Just like Rs.1000 had great value in the 1990s but not now, the same may happen to Rs.1 lakh in 2030.
Equity is one of the key asset classes that has the possibility to beat inflation to earn positive real returns in the long run.
Inflation is the biggest challenge for returns generated from any form of investment.
It is important for real returns (returns minus inflation) to be positive than nil or negative.
On a Lighter Note:
When we look at the moon from earth, it looks very beautiful.
However, when we see the moon from a telescope or see the photographs of the moon from close quarters,
we observe that it has many craters as well which are not visible from a far distance.
Taking this analogy for equities, they are only attractive if they are held for the long term but may prove to be harmful if held for the short term
India’s Top Wealth Creators Since Last 25 years. (Year 1995 To Year 2020)
India’s Top Wealth Creators are mix of old and new companies from RIL to Kotak Bank, unlike in the US where newer ones generated most wealth.
A study showed that just 2% of 5,000 companies outperformed the Sensex in last 25 years
While the most profitable companies have all been MNCs like HUL, Nestle India, Colgate-Palmolive,
The best dividend paying companies were all domestic ones like ITC, Infosys, and Hindustan Zinc etc…
Infosys fastest wealth creator in 25 years; RIL biggest
Infosys clocked a robust price compound annual growth rate (CAGR) of 30 percent to emerge as the fastest wealth creator between 1995 and 2020.
Reliance Industries was the biggest wealth creator in this period, creating wealth worth Rs 6.3 lakh crore in 25 years.
It also observed that RIL is significantly ahead of the second-biggest wealth creator HUL, which accounted for Rs 4.9 lakh crore wealth.
Infosys and Bajaj Finance were also on the list for both the fastest and biggest wealth creators.
The average market cap of the top 25 fastest wealth creators was Rs 400 crore in 1995, which stood at over Rs 75,000 crore in 2020.
Rs 10 lakh invested equally in these 25 stocks in 1995 would have grown to Rs 16.2 crore in 2020, delivering a 25-year CAGR of 23 percent.
The top twenty of the fastest wealth creators all gave the equivalent of 20 percent returns every year.
Moreover, Kotak Mahindra Bank has emerged as the most consistent wealth creator between 1995 and 2020.
Six of the top 10 consistent wealth creators are also among the top 10 fastest wealth creators Berger Paints, Pidilite, Shree Cement, Honeywell Automation, Motherson Sumi and Sun Pharma.
The biggest wealth creators’ list has names including HDFC, Kotak Bank, ITC, Asian Paints, and Nestle India.
Now we understood the strength of Equity Investment
“All intelligent investing is value investing. Acquiring more that you are paying for. You must value the business in order to value the stock.”
Investing in Equity is Subject to Market Risk. Please read the document carefully before Investing.
Disclaimer: All the views in the video are personal of the author not attributing to any one.
