Some people have made millions and even billions from the stock market, or we can say the equity market. If you can understand equity investments, it is the easiest way to become a millionaire and achieve your financial goals.
There are two sides to equity investment.
- Whenever someone tries to make money faster, he/she ended up losing money.
- When someone stays invested for the long term, he/she able to create a fortune.
In this session, we will cover these questions:
● What is the importance of equity?
● What is Compound Interest?
● What is Equity Investment?
● What is Trading in the stock market?
● What is Diversification?
Importance of Equity Investment:
The legendary equity investor Warren Buffett once said, ‘’Someone is sitting in the shade today because someone planted a tree a long time ago’. From this quote, we can understand how equity investments can not only be useful for your future but also for your future generations.
There are so many options for investments. That includes Real estate, certificate of deposit, roth IRA, 401k NPS,, private equity for HNI (High net worth individuals), and equity.We have already discussed the pros and cons of investing in real estate.
401k, certificate of deposit, and roth IRA cannot provide you hig0her returns. Hence, you cannot achieve your financial goals by investing in such an area. You can achieve technically. But it will take so much time that’s the reason it is not the practical approach to invest a large portion of our hard-earned income in CD, 401K and roth IRA.
There is no doubt. Equity is riskier than real estate, CD, roth IRA, and 401k. We cannot ignore equity because it gives higher returns than all the other types of investment options. That’s the reason one needs to understand all the fundamentals of equity before investing.
The good thing about equity is we don’t need to invest a higher amount. Whenever we want to sell shares or units, we can easily sell.
If you believe that the country where you live is growing, that means the economy is becoming more powerful. Have you ever imagined? You can also become a part of your country’s growth story. How? By investing in equity. Why? Because you are helping other companies to grow, and that eventually helps the economy to grow.
Albert Einstein once said, ‘’Compound Interest is the eighth wonder of the world. He who understands it earns it. He who doesn’t pay it’’.
In simple language, if we understand compound interest, we can create a fortune for ourselves, and if we don’t understand, we may face financial trouble in the future. The purpose of creating this course is to educate about personal finance. That’s the reason we should focus on understanding the concept. And understanding in the easiest language is the best thing I can do for you.
Let’s first understand simple interest.
I = P * R * T. Principal amount, Interest rate per year, time in a year.
It is a multiplication of principal amount, interest rate, and time in a year. The compound interest can be defined as interest on interest. Let’s understand with an example.
Suppose we calculate the simple interest. Assuming the principal amount in $10,000, the interest rate in 7% and 10 years. At the end of the 10th year, we will get $17,000. If we calculate the compounded interest, assuming the same numbers, we
will get $19,671 at the end of the 10th year considering yearly
compounding. Sounds cool, right?
You have $100 in your bank account and assuming that the rate of interest is 1%. So, after one year, you will have $101. Now, if we follow the method for simple interest, after 10 years, you will have $110. However, if we apply compound interest, it will be $110.51. Sounds like extremely small difference, right?
John starts investing $400 per month in S and P 500 index funds for 30 years. Currently, he is 25 years old. He has decided that he is willing to give long period so that his money can work hard and over the long period of time, he can become wealthy. The total invested amount would be $144,000. Expecting an 8% annual return, the maturity value would be $600,118.97.
Remember that, the more you invest and the more time you give to your investment, the more you get. That is why we say, “Time is Money”.
If we calculate the value of $10,000 at the end of 20 years, we will get $24,000 considering simple interest. On the other hand, if we calculate the compounded interest, the amount would be $38,696. Huge difference, right?
We have still taken yearly compounding. If we take monthly compounding, that means our money gets compounded 12 times in a year, then in the next 10 years, considering $10,000 as a principal amount, the value would be $20,096. And for the 20 years period, the value of $10,000 would be $40,387.
That’s what we call the ‘power of compounding’.
The more time you give to your investment, the more you get.
When we invest our money in a company by purchasing shares of a company, it is called equity investments, also call Stock investment or share investment.
When the company in which we have invested money will make a profit, we as a shareholder will benefit as our investment value will increase. And also, when the company makes a loss, the value of our investment will decrease. Also, we have invested some amount in a company, let’s say $10,000. Now, that means we become owners of a company worth $10,000.
The company wants to raise money from the general people, all the board of directors and owners dilute their share and invite people to invest in the company. This activity is called Initial Public Offering(IPO).
There are many blue chip, and large companies providing amazing returns in the last 20 years.
Equity investment contains risk because we, as investors, are investing in a business. Picking a bad company increases the chance of money. And, it’s like high risk and high return. Most of the billionaires in the world have acquired wealth is just because of EQUITY.
The more equity or ownership of high-quality companies you have, the richer you become. Here I have some data from Investopedia just for an example.
If you invested in Apple IPO in 1980, the stock was listed at $22. Let’s say you have invested $220, and hence in 1980, you owned 10 shares of Apple. By the end of August 12, 2018, the value of $220 has become $112,268. This is how long term investment makes people wealthier.
We will cover all the things about direct investing in stocks and investing via equity mutual funds. I am sure that you will get so much value after completing all the detailed videos on equity investment.
Trading in the Stock Market:
The activity of buying and selling is known as trading.
When we perform such activity in the stock market, Trading is on Equity or Stock market trading. In which we can buy and sell the shares of all the listed companies in the stock market.
I would not advise you to start trading in the stock market to make money quickly. In trading, the chances of losing increase a lot. People start trading in a particular stock because they may have got the ‘tip’.
For instance, the X company is going to launch a new product today. Those who feel the stock price is going up today; they buy shares in the market opening time, and if the price goes up, they immediately sell shares before the end of the day and book the profit.
In the same case, some people have invested in an X company. They know that the company is launching a new product today. That’s why the share price will increase. Such people take advantage of such a scenario and sell all the shares and book their profit. In the end, there are thousands of people who have millions by trading in the stock market. But, millions have lost billions by trading in the stock market.
So, I hope you understood the concept of trading. And why it is so risky. In the next lecture, we will understand diversification in equity. So let’s go.
Investing via Direct Stocks:
A lot of risks are there, so direct investing in the stock market can give you tremendous returns. It contains a lot of chances of losing money.
That’s the reason if you don’t know how to pick the right company for the investment then you should not invest.
Here I spoke, “picking up the right company,” not “picking up the right stock”. Why? Because we are going to invest for the long term. Our approach is wealth creation. People who say “picking up the right stock” are mostly traders. Their approach is to take a maximum risk and make money in the long term.
Once you understand the company’s business model and revenue stream, you should check the PE(Price to Earnings ratio), Earning per share(EPS), Book value, balance sheet are lots of things before investing.
After doing all your research, if you are confident, then you should invest. Otherwise, in the long run, you may lose money or get fewer returns than CD and 401K. That’s the harsh reality.
On the positive side, if the company you have invested in performs really well, your invested amount can multiply with 100 in the long run!
In the end, it contains a significant risk.
Those who don’t have enough knowledge should not invest with direct investing. We have an amazing alternative option call “Mutual Fund”. You don’t have to be super smart and intelligent to become a wealthy person.
In the mutual fund section, we will understand how we can create wealth by becoming a more patient and disciplined person.