You may have heard a lot of people saying – “Oh! The market is down today”, “I have purchased XYZ shares”, “This stock is will rise in future”, “I Invest in mutual funds”, etc. You may have also heard or read advertisements regarding investments that comes up every time with a caution – Investments are subject to market risks, read all the documents carefully before investing.
Have you ever wondered as a student about what exactly are stocks, shares, mutual funds, bonds, etc.? How do people invest in these assets and how is wealth created out of it? Generally, we are not at all educated about investing properly in India. Many of us have a negative image of investing in these assets. It is seen as a form of gambling, with a possibility of losing all the money we put in. which is not at all the case. In this blog, we will discuss and try to make you understand about the very basic terminologies of investment market and how they work, in very simple words. But before that, it is necessary to understand why people need to invest, and what are the benefits of investing as a student.
Importance of Investing
In the last blog we discussed about the importance of saving money. What if I tell you that saving money isn’t enough? That your money is actually losing its value over time instead of retaining constant value?
Suppose you successfully saved ₹100 in a month, let’s say June. You want to have a choco lava cake worth ₹100 but you decide, due to some reason, to have it next month. You keep aside the money in your piggy bank and wait for the next month. But when in July, you visit the bakery store, you are heart-broken to see that the price of choco lava cake has increased from ₹100 to ₹110. Unfortunately, you cannot purchase it now.
You could have purchased a lava cake last month with the same 100 rupee note, but now, because the price has increased, you cannot afford it. This, when applied at a macro level, is called inflation. The value of your money keeps on decreasing as the general price level in the country increases every year. This directly means that your money, when kept idle, is not stable. It keeps losing its value with time.
- Investing, after proper knowledge and strategy, helps you to beat inflation by wide margins. This means that your ₹100 can multiply and become far more than the increased price of choco lava cake.
- It will help you to make extra wealth out of your existing wealth. In other words, it makes your money to work for you and make extra money.
- Therefore, many short term, and long term financial desires can be easily achieved through proper investment strategies.
- As students, you can take a huge advantage of your young age. If you start investing early in a disciplined manner, you will collect immense wealth after 20-30 years due to the phenomena of compounding.
- It is one of the simplest (though not the easiest) way to make money. The only requirement is correct knowledge, strategy and patience.
Benefits of Investing as a student
- It is one of the most important aspects of financial knowledge. If you acquaint yourself with investment in shares, mutual funds or SIPs, you will definitely gain an edge in future, even over people with same salary as yours.
- It can be useful for your short term demands and needs. You can gain enough, with proper knowledge and strategy, to fulfil your small requirements.
- Power of compounding: The most profound benefit of investing as a student is your young age. One, if you start investing regularly (in SIPs or small cases), the interest rate will compound and give back to you a hugely multiplied return.
- For example, Suppose, you invest ₹2000 every month for next 30 years in mutual funds through SIP. Let’s suppose the rate of interest to be 15%, which is very frequently possible. At the end of 30 years, the total amount invested by you will be ₹7,20,000. But, the total amount that you will receive will be ₹1,40,19,641 !! That’s the power of compounding.
- But, if you reduce the time period, let’s say you invest for 10 years only, other conditions remaining the same, you will get only ₹5,57,315 on a total investment of ₹2,40,000.
We will deal with SIPs in detail in a separate blog. This was merely an example to make you aware of the importance.
STOCKS AND SHARES
Issuing shares is one of the ways of raising fund for the company. Suppose a company XYZ is in need of more capital and funds to carry on its business. It can issue its shares in the stock market where people can purchase them. By purchasing a share of a particular company, you own a specific part of that company. Thus, shares indicate a percentage of your ownership in the company. Persons who own shares of a company are called shareholders.
By purchasing shares of a company, you can earn in two ways:
- By receiving dividends. Many companies offer a part of their profits to its shareholders, which is called dividend. So, if a company has announced a dividend of ₹2 per share and you own 200 shares of that company, you will get ₹400. However, not every company offers dividends.
- By share appreciation. When the market value of shares increases beyond the price at which you had purchased them, you can sell the shares to gain profit. For example, if you had bought the shares at ₹1000/share and the current price has risen to ₹1005/share, you can sell them to make a profit of ₹5/share. Thus, if you had purchased 200 shares you will make a profit of 200 × 5 = ₹1000. This can be further bifurcated into two groups, investing and trading. When you hold shares of a particular company for a long period of time, usually many years, it is called investing. On the other hand, when you buy and sell shares to make quick profits within a session, it is called trading. The latter is riskier and requires deep knowledge of the company and market than the former.
The three very common terms you will hear or read are – authorised shares, shares outstanding and floating stocks.
Authorised shares refers to the number of shares that a company is legally permitted to issue (The number of shares that the company finally issues is called ‘issued shares’). Shares outstanding indicated the total number of shares that are presently owned by shareholders, whether investors from inside the company or outside it. Floating stocks refers to that amount of share outstanding which is available for trading in the market.
What is the difference between stocks and shares?
Both the terms are very closely related and are often used interchangeably. While shares indicate that a person has invested in a particular company, the term ‘stock’ indicates that the person has bought shares of different companies. For example, if I say that I have invested in stocks, it means that I own some shares of different companies. Thus, stock is a more general term than shares.
Also, a stock market allows you to invest in bonds, debts and shares of different companies whereas a share market allows only trading of shares.
BONDS
A bond is more or less like a loan, granted by a group of investors to a corporation or the government for a specific period of time, in return for a specific rate of interest. On the date of maturity, the borrower returns the entire amount to the investors. These are considered as debt investments, as bonds are issued by the company or the government to repay their debts.
Bonds can be secured or unsecured. Former refers to the bonds backed by any kind of collateral and the latter isn’t backed by any security.
Bonds are less risky and are considered a safe investment. However, the rate of return (bond yield) is generally less than the returns that can be earned through shares. Usually, investors purchase bonds to diversity their portfolio and to manage risks.
The upcoming blogs will elaborate more about these concepts, and introduce you to more new concepts like mutual funds, SIPs, small cases, cryptocurrency, etc.
Stay tuned!
