When you think of investing the first thing that comes into mind is this complicated world of stock market. Where there are so many charts and numbers. It’s easy to get confused. So let’s break it down and let’s try to make sense out of it through an example.
How do you grow a plant? You first sow the seed in the soil. Give it as much water, sunshine. Then, one fine day, you see a small stem and the first few leaves crop up. Over time, the small stem grows large. The plant them blooms flowers and even fruits. For the rest of our life, you benefit from your initial efforts in planting the seed. Investing is similar.
Investing is the art of committing resources (Money) into some endeavor or thing (Financial investment) in the expectation of a positive return (More money). There are ‘N’ number of options available for allocating money but let’s primarily focus on stocks.
What is a stock?
A stock is an investment in a company. When you purchase a stock from a company, you become a shareholder, and the small piece you own is called a share. Thousands of stocks are available for anyone to buy and sell on public exchanges. For this reason, stock investments are some of the most well-known and popular ways to invest and build wealth.
How does Investing work?
Investors buy and own stocks in hopes that the company will succeed. When the company does well, its stock owners share in those profits. Conversely, shareholders can also expect their returns to be diminished if the company underperforms or declines. And in the worst-case scenario, a stock owner’s shares could become worthless if the company was to go bankrupt.
How are returns offered?
There are two primary ways that shareholders can earn returns on their investments: capital gains and dividends.
1.Capital Gains-
Let’s say that you bought 100 shares of ABC company at ₹ 50 per share for a ₹ 5,000 investment. Ten years later, ABC shares are trading at ₹ 100. If you sold your shares at that moment, you’d receive ₹ 10,000. You’d profit ₹ 5,000 for an annualized return of 7.18%.
2.Dividends-
You purchase 50 shares of XYZ company which pays a quarterly dividend of ₹ 1. In this example, you’d receive ₹ 50 per quarter and ₹ 200 per year in annual dividend payments from the company. If the company raised its quarterly dividend to ₹ 1.10, your quarterly payout would increase to ₹ 55 (₹ 50 x ₹ 1.10 = ₹ 55) and your annual dividend income would grow ₹ 220.
Dividends give investors a means of realizing income without having to sell any of their shares – even during years that the stock price declines.
Investors may focus heavily on a company’s fundamental and long-term prospects. When you invest in a stock, You’re betting that over time the company will grow. Ignore short term fluctuations. However, there are no guarantees. Whenever a public company fails, it’s stock investors are likely to suffer as well.
The amount of money, needed to invest depends largely on the type of investment and the investor’s financial position, needs, risk appetite and goals. Despite how you choose to invest or what you choose to invest in, Read and research over it and ‘Never invest in a business that you do not understand.’
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