Is Stock Market risky for investment in India? Let’s take a simple real-life example to answer this question.
Your friend has a business plan and he wants you to invest.
You sit, discuss and understand his business plan. The idea convinces you and you decide to invest your hard-earned money.
Now, ask yourself these questions:
- Do you think you could lose some of your investment?
- Is there a possibility of losing your entire investment?
- Do you think you could earn money?
- Can your business idea become a huge success and make you super rich?
The answer to all the above questions should be – Yes.
If what you sell is not liked by your customers, you could lose a part of your investment.
If your friend turns out to be dishonest, you could lose your entire investment.
Even if he is honest, but doesn’t manage the business well, you will lose money.
However, if the products are liked by the customers, you could make some money.
In the long run, depending on the capability of the people running the business, it could become a huge success. Both you and your friend can become extremely wealthy.
When all of the above can happen, do you think there is risk attached to your investment?
The answer, once again, is yes.
Wherever there is no certainty, there is risk.
Even crossing the road is risky, but if you do it carefully, is it really that risky?
The stock market is EXACTLY the same.
When you invest in a stock – you are buying a small share of the business. That is the reason it is called ‘share market’.
When you buy Reliance Industries, you are getting a small portion of their extremely successful business.
If Reliance does well in the future, you will make some money.
If Reliance performs extremely well and becomes a global business, shares of the company will make you rich.
If Reliance performs below expectations, you may lose some money.
God forbid, something happens to Mukesh Ambani (he is human after all) and the company falls into less capable hands – the Reliance empire could fall and you could lose your entire investment.
Mukesh’s brother Anil is a living example of this. 10 years ago, he was in the Top 10 richest Indians. Today, he is worth nothing. All his shareholders have lost money.
The same with Vijay Mallya.
In business, anything can go wrong anytime.
Stock Market is not very risky
The reason why the stock market is not ‘very’ risky is because it has one fantastic option – which no other business provides.
The ability to sell and exit completely at any moment.
Think about it. If you start a real life business and want to get out of it due to losses – the procedure is complicated. There are legal formalities and it could take a long time to sell your assets.
If you have a shop on rent with working staff members, it could get even more complicated to shut down because of agreements.
In the stock market, shutting down is immediate. Login to your trading account, sell the shares and get money deposited into your bank account within 2 days.
You are free to invest it anywhere or keep it in your savings account and earn interest.
Like every good thing in life, there is a downside to this too.
Since the price keeps changing every moment, the value of your investments constantly keep rising and falling. When you combine this volatility with the ability to sell quickly – it results in impatient decisions or decisions that are not taken with a clear mind.
Staying invested in good companies for long term reduces the risk considerable. But intraday or short term trading without knowledge and experience – is a shortcut to losing all your money.
Taking responsibility for your decisions
Let’s go back to our example.
When your friend comes to you with a business plan, it’s your responsibility to do your research, understand his idea and then take a decision.
If you decide to invest and your friend does not deliver, it’s your judgement that has failed.
It’s the same in stock investing. It’s your duty to do your analysis, understand the business and buy the stock at right valuations.
If you fail there, you cannot blame the company or its management.
When you have the opportunity and freedom to invest in any of the 5000+ listed companies – it should not be difficult to pick 20 companies from them. Especially when there are around 100-200 top notch companies to choose from.
NOT investing in stock market is risky
This brings me to the last section of the article.
Not investing in the stock market is risky. You read that right.
Why do you invest money? The goal is to grow your money and beat inflation.
If you do not understand what is inflation, there will be a separate article on that topic on this website.
Now, if you keep your money in savings bank account, you get 3.5% interest. In Fixed Deposits, the interest is around 5-6% and this has been decreasing.
Public Provident Fund (PPF) and other risk-free investments give around 7%.
The average inflation in India is around 5-6%.
If you are from an aspirational middle-class family, your inflation is probably around 10-12%.
There is an easy way to calculate this. How much were your expenses last year? Compare them to this year. The increase in percentage is your inflation.
Example, if you spent 2 lakhs in 2019 and 2.2 lakhs this year – then your personal inflation is 10%.
If you invest in fixed deposit, you are actually losing 4% of your money every year due to inflation.
The only asset class that has the potential to beat inflation in a growing country like India – is equity i.e the stock market.
If you are young and do not have 70% of your savings in equity, you will struggle to grow your money. The power of compounding will work against you.
If you do not even have savings, then it’s time for you to consider saving some money. If your expense is equal to your income, then you are aren’t earning anything.
If your expense is more than your income, then you could be in big trouble very soon.
Earn. Save. Learn. And invest. This is important. If you aren’t doing it already, start now!