Why to invest in Stock Market and not other Instruments?

Published: 09th November 2011
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The basic questions, which a stock market beginner is worried about are 'Is my money safe here?', 'Will I at least get the money, which I have invested?', 'Should I hold or sell off the stock?' But my question to all the people is: 'How much actually have you earned when you invested in other safe investments?' Most importantly, 'Does it really satisfy your financial needs?' Our entire economy works on risk reward returns. Thus one needs to take some calculative risk if he wants to earn something good.

'One who dares, always fares.'
Some great names of this field who themselves have earned a lot from this market; Warren Buffet, Rakesh Jhunjhunwala etc. I remember one statement which I read somewhere that, " Stock market is a place where you do not increase your wealth, rather it is the place where you multiply your wealth." This shows that share market is an ocean and it depends on you, how much to extract the maximum from it.

Power of Equity
I will make you understand the power of equity with one example that will clear all you doubts and help you make up your mind. Let's play one game, I will ask you one question and just think of an answer in your mind. Then, compare your answer with the actual answer given below.

Q. How much can you make in 26 years by just investing Rs.10000 initially in any of financial instruments?
Options are:
Gold, Silver, Property, Shares, Bank FD or Bonds

What should be the answer according to you?

Ans. Let us compare the rate of return from each financial product.

  • GOLD - Rs.10000 invested in gold in 1981, market value as on 2011 Rs.1.60 lacs.

  • SILVER - Rs.10000 invested in Silver in 1981, market value as on 2011 Rs.2.50 lacs.

  • PROPERTY - Rs.10000 invested in Property in1981, market value as on Rs.3.50 lacs.

  • SHARES/STOCKS - Rs.10000 invested in Shares in 1981, market value as on Rs.200cr plus.

You might not believe it, but it's true.. See the chart below:
If you had subscribed for 100 shares of WIPRO with a face value of Rs.100 in 1980,

  • In 1981 company declared 1:1 bonus = you have 200 shares.

  • In 1985 company declared 1:1 bonus = you have 400 shares.

  • In 1986 company split the share to Rs.10 = you have 4000 shares

  • In 1987 company declared 1:1 bonus = you have 8000 shares

  • In 1989 company declared 1:1 bonus = you have 32000 shares

  • In 1995 company declared 1:1 bonus = you have 64000 shares

  • In 1997 company declares 1:2 bonus = you have 1,92,000 shares

  • In 1999 company split the shares to Rs.2 = you have 28,80,000 shares

  • In 2005 company declared 1:1 bonus = you have 57,60,000 shares

Thus Rs.550 (approx.) * 57,60,000 SHARES=Rs.200cr plus. Thus your investment value of Rs.10000 is now Rs.200cr. plus. This if the POWER OF EQUITY

Not only WIPRO there are many such companies who would have turned you into a millionaire such as…

CIPLA - Investment of Rs.10000 in 1979 would have fetch Rs.95cr plus.

INFOSYS - Investment of Rs.10000 in 1992 would have fetched Rs.1.50cr plus.

Ranbaxy - Investment of Rs.10000 in 1980 would have fetched Rs.1.90cr plus.

There is this concept called as RULE OF 72, very popular in banks especially when it comes to "calculating the time when your investment gets doubled."
The ‘Rule of 72’ is a simplified way to determine how long an investment will take to double, given a fixed annual rate of interest. By dividing 72 by the annual rate of return, investors can get a rough estimate of how many years it will take for the initial investment to duplicate itself.

For example, the rule of 72 states that Rs.100 invested at 10% would take 7.2 years ((72/10) = 7.2) to turn into Rs.200. In reality, a 10% investment will take 7.3 years to double ((1.10^7.3 = 2).

When dealing with low rates of return, the Rule of 72 is fairly accurate.
This rule is basically applied to all the investment products and is necessary to calculate, as it gives the clear picture of the number of years in which an amount invested gets doubled.

Thus applying this rule to above example, which we saw earlier
(refer pg.1). The time taken by each financial instrument to double your investments of Rs.10000 are as follows:

  • Gold - 2YRS-Rs.5000 (50%)

  • Silver - 9months-Rs.8000 (80%)

  • Property - 7months- Rs.11,333 (110%)

  • Shares - Less than 1 day- Rs.6cr plus.

  • Bank FD or Shares - 7 YRS- Rs.1000 (10%)

This is something which is eye-opening for a lot of us. Here at http://www.dstreetmantra.com you get many free services, tips and tools which will help you broaden your knowledge about Stock Market. Not only that, the blog http://www.dstreetmantra.com/our_mantras.php is a great resource for any stock market investor.

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