The Power of Compounding- Secret of Making Money

The Power of Compounding- Secret of Making Money: Benjamin Franklin once wrote somewhere: ”’tis the stone that will turn all your lead into gold Remember that money is of a prolific, generating nature. Money can beget money, and its offspring can beget more.‘‘

At a very young age, I was introduced to the concept of the power of compounding by my grandfather. He told me a story to explain it better which I am going to narrate here:

…..

“Once upon a time, there lived an honorable king in a prosperous country. He was well known all over the country for his trustworthy words as he always kept his promise no matter what. Because of this nature of the King, he was widely regarded by people in his kingdom.

All the people in his kingdom were very happy and leading a peaceful life. However, there was a cunning burglar in his capital city. Once, when he was trying to steal some jewels from one of his minister’s house, he was caught red-handed. He was presented in front of the King. At that time, the king was playing ‘CHESS’ with one of his ministers.

The punishment for stealing in that country was death. Nevertheless, the burglar knew about the honorable nature of the king. He demanded one last wish from the king. The king agreed and said that if it was in his power and goodwill, he will fulfill his wish.

The burglar said, “O Brave and honorable King! I knew that the punishment for stealing in this country is death. However, I tried to steal some jewels only because I could not see my family suffering from hunger. After I am gone, I just wish them to have enough food to carry on their lives for a few days before they manage it themselves.”

Then he further added, “My wish is simple. As I disturbed you while you were playing chess, I want my wish to be related to your game. I only wish for one grain of rice for the first square of the chessboard, two grains for the second square, four grains for the third square, eight for the fourth square and so on for all 64 squares.“

The King granted the burglar’s wish without much thinking and regarded it as a small wish. He happily accepted his wish and promised that he will only be prosecuted after his last wish was fulfilled. However, a week later, the king’s treasurer informed the King that even his whole kingdom doesn’t produce as much rice as promised. The quantity of rice promised might not even be produced by combining many countries.

In the end, the King was forced to give his kingdom and all his possessions to the burglar, as he could not keep his promise. That is the power of compounding.””

….

I was amazed when I realized what wonders compounding can do. I still remember my grandfather’s words after the story “The strongest force in the universe is Compound Interest.” Although later, I found out that these words weren’t his words but were originally Einstein’s words. However, hearing this from my grandfather at that young age was quite inspiring.

Another book that I read at a young age- ‘Think and Grow Rich’ by Napoleon Hill. This is the number one self help motivational book that I have came across. I definitely recommend everyone to read this book.

The Power of Compounding:

The power of compounding can be explained as: “Power of compounding is reinvesting or compounding of income on the initial amount invested and also on the accumulated interest over previous years to grow the amount invested year over year.”

Now, you might be thinking what’s so great about the power of compounding. Even a fifth-grader knows the term. Yes, you might argue that. However, there are things that the fifth-grader doesn’t know and if he understands it, he can set the whole world on fire.

Let’s see how the concept of compounding works. Suppose Rajat invested Rs 1,00,000 at the age of 20 and locks all his investments till retirement. Arvind, however, doesn’t make any investment till he is 40. At 40, he invested Rs 1,00,000 and locks it till the age of 60. The table below tells you how their investments would turn out when they both are 60, assuming that the growth rate is 15 percent per annum. The results are eye-opening.

the power of compounding

On retirement, Rajat will get over Rs 2.6 Crores while Arvind will only get Rs 16 lakhs. Therefore, over 16 Times Growth in the Investment for Rajat compared to Arvind. That’s the power of compounding

Compounding is a simple, but very powerful concept. Why powerful? Because compounding is similar to a multiplier effect since the interest that is earned by the initial capital also earns an interest, the value of the investment grows at an exponential rate rather than an arithmetic linear rate. The higher the rate of return, the steeper the curve.

Here is a chart of returns on compound interest vs simple interest. The principal amount is Rs 1 lakhs and an annual returns on both simple and compound interest is 15%.

the power of compounding trade brains

I am glad that I received this financial advice at a very young age. This financial knowledge has changed my life and still changing. I hope you understand this concept and the next time you plan to borrow money on credit cards, remember that compounding is working against you.

New to stocks and confused where to start? Here’s an amazing online course for the newbie investors: INVESTING IN STOCKS- THE COMPLETE COURSE FOR BEGINNERS. Enroll now and start your stock market journey today!

May 23, 2017 Investment Basics 5 comments
One up on Wall Street By Peter Lynch

One up on Wall Street By Peter Lynch Book Review.

One up on Wall Street By Peter Lynch Book Review:

“Invest in what you know”

“Investing without research is like playing poker and never looking at cards.”

“Invest in what you know. It leaves out the role of serious fundamental stock research. People buy a stock and they know nothing about it. That’s gambling and it’s not good.”

-Peter Lynch

This book is one of the best book published on stock market investing and an all-time best seller. The book was originally published in 1989 by Peter Lynch.

First of all, let me give you an introduction to Peter Lynch if you already do not know him so. Peter Lynch is an American Investor and a former fund manager.  He was the manager of the Magellan fund at Fidelity Investments between 1977 and 1990. During this period, Lynch averaged a 29.2% annual return on the investments. This return was consistently double than the market index. Apart, during this period of 13 years, the asset under the management which was originally $18 million in 1977 increased to $14 billion. He is one of the rare fund managers who gave a fairly good return to their investors for 13 years in a row.

Also Read: 10 Must Read Books For Stock Market Investors

One up on the Wall Street By Peter Lynch book reviewIn the book ONE UP ON WALL STREET, Peter Lynch gives advice about how a common person can get great returns from his investment in the stock market. Lynch believes that with a little research and steady discipline, every common person can surpass the so-called investment gurus.

Peter Lynch is advocates the idea of ‘Invest in what you know’. He suggests that many great investments could be right under the nose. Common people just have to look around to grab those opportunities. An average person is exposed to interesting local companies and products years before the professional investors and if they invest in what they already know, they will surely get good returns.

Now let us understand what ‘Invest in what you know’ really means:

Suppose, you are a doctor. You are interested in buying a stock. Then you went back home and searched a petroleum stock, that you think is good and invested in it.Assume, there is another investor who works in a petroleum rig and he is also interested in investing. He also goes back home and searched for an appealing pharmacy stock and invested his money in it.

What do you think the outcome of both the investments will be?

It’s most likely that both these investors will give below average returns. The doctor, who has a good knowledge of pharmacy sectors and knows which new medicines are doing great for patients, invested in the petroleum stocks.

On the other hand, the person who works on a rig, and knows a great deal about oil & gas sector, his competitors, the future of the sector, which petroleum company is doing great etc decided to invest in pharmacy instead of oil and gas sector.

If only, they have invested in what they know, it’s highly likely to get a decent return for both the investors.

Peter Lynch further calls this as ‘taking advantage of what you already know’.

One up on Wall Street By Peter Lynch Key Advises:

There are a number of great investing advises given by Peter Lynch in this book. Here a couple of those advises:

  1. ‘Only invest what you could afford to lose without that loss having any effect on your daily life in the foreseeable future’.
  2. There are few qualities which are required for a successful investor. They are Patience, self-reliance, common sense, open-mindedness, tolerance to pain, detachment, persistence, humility, flexibility, willingness to do independent research, an equal willingness to admit to mistakes, and an ability to ignore general panic.
  3. Invest in companies, not the stock market.
  4. Ignore short-term fluctuations.
  5. Do not try to predict the economy. A great many personalities have failed. Predicting the economy is futile.
  6. Large profits can be made in the stock market. Large losses can be made in the stock market.
  7. ‘If you want to avoid a single stock, it would be the hottest stock in the hottest industry’. Boring stocks gives the best results.

Further, in this book, Peter Lynch also describes 6 types of stocks which are found in any market. I have also written a post about the different type and you can read more about it here: Six Different Types of Stock in Indian Market according to Peter Lynch.

Other Key  Points:

Peter Lynch also gives describes how to choose a stock and the things to consider before buying the stock. In his ‘The two minute drill’ in the book, Lynch gives a simple drill that every common investor should use before buying the stocks. This book also gives advice about how long to invest and when to sell. Alongside, in chapter 18, one of the best chapters in the book, he narrates about the twelve silliest (and most dangerous) people say about the stock market.

Overall, ONE UP ON WALL STREET by Peter Lynch is a must read the book for all the stock market beginner investors. Peter Lynch’s thesis in the book is simple, logical, pragmatic and easily replicable. All the common investors can get great benefits by reading this book.

If you want to buy this book, I will highly recommend you to buy it from this Amazon link. The book is selling on the best price currently at Amazon:
One Up On Wall Street: How To Use What You Already Know To Make Money In the Market

I hope the post ‘ONE UP ON WALL STREET By Peter Lynch Book Review’ is useful for the readers. If you have any doubts or suggestions, feel free to comment below. I will be happy to get a feedback.

One up on the Wall Street By Peter Lynch trade brains

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May 22, 2017 Books 1 comment
10 Common Stocks at Rs 100 or less as Market Price

10 Common Stocks at Rs 100 or less as Market Price.

10 Common Stocks at Rs 100 or less as Market Price. Many people think that they require huge lot of money to invest in share market. But it is not so true.There are lots of company in Indian stock market whose market price is even less than the cost of a burger.

There are a number of penny stocks trading between Rs 1 to 10 (find more here). Even, big companies like Ashok leyland, Tata Power, Steel Authority etc are also selling at a market price lower that Rs 100. So, today I am listing the list of such 10 Common Stocks at Rs 100 or less as Market Price.

10 Common Stocks at Rs 100 or less as Market Price

S.No Company Price (In Rs)
1 Idea Cellular 86.70
2 Federal Bank 92.70
3 Ashok Leyland 82.50
4 Tata Power 85.55
5 Crompton Greaves 79.50
6 IDBI Bank 75.10
7 National HyroElectric Power Corporation (NHPC) 32.25
8 Reliance comm 36.80
9 SAIL (Steel Authority India Ltd) 63.85
10 Bombay Dyeing 83.50

Funny, the stock prices of these companies are even less than the Ola or Uber ride fare.  Still people speculate that buying stocks are expensive.

In addition, you can further find a list of large number of stocks, who range from RS 1 to 100  here: http://money.rediff.com/companies/price-sorted/10-100

Disclaimer: Please note that I am not recommending  you to buy these stocks just because their price is low. You should always buy a stock only when its selling at a bargain price. Bargain stocks are not such stocks whose share price is low. Its those stocks which are trading at a much lower than its intrinsic value.

Tags: 10 Common Stocks at Rs 100 or less, Indian stock market 10 Common Stocks at Rs 100 or less as Market Price, 10 Common Stocks at Rs 100 or less as Market Price in India

May 10, 2017 Market, Stocks 2 comments
10 Common Stocks that gave more than 100% return last year

10 Common Stocks that Gave More Than 100% Return Last Year -2017

10 Common Stocks that gave more than 100% return last year. Peter lynch, the legendary investor and fund manager, used to say ‘‘Invest in what you know’’ in his best-selling book “One up on the Wall Street”. By this he means –‘there are a number of common stocks which anyone can find easily around them if they are looking’. You do not need to find a rare petroleum stock which no over has ever heard.  You just have to look around and find some decent companies in your surroundings to invest in.

“Know what you own, and know why you own it.”

“The simpler it is, the better I like it.”

“The worst thing you can do is invest in companies you know nothing about. Unfortunately, buying stocks on ignorance is still a popular American pastime.”

– Peter Lynch

So, toady I have compiled a list of 10 such common stocks which a common people could have found easily while walking in their city or during travelling in the city-bus.

Here is the list of the 10 Common Stocks that gave more than 100 percent return last year. I hope few of them are in your portfolio for over a year.

10 Common Stocks that gave more than 100% return last year.

STOCK 8-May-17 9-May-16 % Change
SENSEX 29926.15 25688.86 16.49
NIFTY 9314.05 7866.05 18.40
INDIAN BANK 352 92.9 278.90
RURAL ELECTRIFICATION 216.6 84.82 155.36
FEDERAL BANK 118.9 49.15 141.91
BAJAJ FINSERV 4409.05 1875 135.14
SUN TV 851 364.5 133.47
PUNJAB NATIONAL BANK 176 82.8 112.56
BANK OF INDIA 185.4 89.35 107.49
INDIAN IOL CORP (IOC) 428.55 209.9 104.16
JAYPEE INFRATECH 14 6.95 101.43
MRF 67501 33650 100.59

Here is the list of other six common stocks that has given more than 50 percent return for the last year.

Best book to learn investing mindset: Rich Dad Poor Dad: What the Rich Teach their Kids About Money that the Poor and Middle Class Do Not! I highly recommend you to read this book.

10 Common Stocks that gave more than 50% return last year.

STOCK 8-May-17 9-May-16 % Change
GITANJALI  GEMS 68.75 35.65 92.84
HPCL 531.5 278.5 90.84
MARUTI SUZUKI 6626 3846.5 72.26
YES BANK 1616.25 945.05 71.02
APOLLO TYRES 240.45 157.2 52.95
TATA COMM 652.05 429.08 51.96

 

Tags: 10 Common Stocks that gave more than 100% return last year, List of 10 Common Stocks that gave more than 100% return last year 2016-17

May 8, 2017 Market, Stocks 2 comments
rich dad poor dad book review

Rich Dad Poor Dad Summary- Lessons by Robert Kiyosaki

RICH DAD POOR DAD Summary- Lessons by Robert Kiyosaki: In the book ‘Rich Dad Poor Dad’, Robert Kiyosaki describes about his two fathers. The Poor dad was his real dad and the Rich dad was his friend’s dad. Here are the characteristics of his both fathers:

POOR DAD RICH DAD
He was a highly educated person with a PhD degree. He never finished his 8th Grade.
The Poor Dad gained a good substantial salary from his job. The Rich Dad used to acquire and run businesses.
He was financially ignorant and used to struggle financially. He was going to become one of the richest men in Hawaii.
The Poor dad always said ‘I cannot afford it’. The RICH dad used to say ‘How can I afford it?’
He was going to leave huge bills to be paid for his next generation. He was going to leave a huge fortune for his next generation.

At a very young age, Robert Kiyosaki decided to learn from his RICH dad instead of his highly educated POOR dad.

The book describes about the lack of financial education given to the kids. The problem with financial education is that it isn’t taught in school. Hence, the family has the responsibility to teach it. However, the trouble is that unless your parents are in top 1%, they are going to teach you how to be poor. This is not because the poor don’t love their kids. It’s because they don’t know what they are teaching.

Therefore, let us learn from Robert Kiyosaki about financial knowledge that he learnt from his RICH Dad.

First we need to know about financial statements. Here is how the RICH Dad taught Robert about the difference between an asset and a liability in simple terms:

  • An asset is anything that puts money in your pocket.
  • A liability is anything that takes money from your pocket.

Easy, Right? Now, the trouble is, anything can be an asset or a liability. In the book Robert argues that ‘Your house is not always your asset’. Let us understand what he means by this.

If you own a house and you pay expenses for running the house like electricity bill, water bill etc, then it is a liability. The house is taking money out of your pocket. However, if you own a house and it brings thousands of rupees a month by renting it, then it is an asset. The house is putting money in your pocket.

The RICH Dad taught Robert Kiyosaki to always invest in assets. Assets can be a business, real estate, paper assets like stocks, bonds etc. Whereas liabilities can be your expensive car, big house bought on mortgage, iPhone etc.

RICH DAD POOR DAD SUMMARY: THREE MOST IMPORTANT LESSONS

LESSON 1: WHAT KIND OF EDUCATION TO GET?

Poor RICH
·Poor Dad advised Robert to get a good education so that he can get a high paying job.

·POOR believe in conventional education.

 ·RICH Dad advised Robert to get a great education so that he can start his own business or buy businesses.

·RICH believe in financial education.

 LESSON 2: WHAT KIND WORK YOU SHOULD DO?

POOR RICH
·POOR work for money {believes is getting a job and work entire life}.

·They work for employer, government & bank.

·They are driven by FEAR & GREED. Fear of losing the job and greed of their next pay check.

 ·RICH do not work for money.

·They make money work for them. RICH owns business and leverages employees, government & bank for their advantages.

·They are driven by themselves.

 LESSON 3: HOW TO INVEST AND SPEND YOUR MONEY?

POOR MIDDLE CLASS RICH
·The poor only have expenses.

·They don’t pay themselves.

 ·The middle class buy liabilities that they think as assets.

·They pay themselves last.

 ·The Rich only buys assets.

·They pay themselves first.

RICH DAD POOR DAD BOOK REVIEW

RICH always pays themselves first. That’s the key point that the RICH Dad taught Robert. Further, he also taught, “It’s not how much you make, it’s how much you keep.”

So, that’s the summary of the book. The book helps all those who do not have a RICH Dad and want to learn what the rich teach their kids about money – which the poor and the middle class do not.

If you haven’t read the book, I highly recommend you to buy ‘RICH DAD POOR DAD’ through amazon at this link. It is currently selling on best price here only through Amazon. Rich Dad Poor Dad: What the Rich Teach their Kids About Money that the Poor and Middle Class Do Not!

Conclusion:

RICH DAD POOR DAD Summary:

  • Financial Literacy is just as equal important as professional education.
  • Do not work for money. Make your money work for you.
  • Invest in Assets, not liabilities.

I hope this post ‘RICH DAD POOR DAD Summary- Lessons by Robert Kiyosaki’ is useful to the readers.

Do comment below what do you think about the lessons from this book.

Tags: Rich Dad Poor Dad Book Review, Rich Dad poor dad summary, Rich Dad Poor Dad Book review and summary, Key points Rich Dad Poor Dad Book review, rich dad poor dad summary and book review

May 8, 2017 Books 7 comments
What kind of Investor You Are - Find Out Here

What kind of Investor You Are – Find Out Here!!

What Kind of Investor you are? In the book ‘The Intelligent Investor’, Benjamin Graham has described two types of investor- Defensive Investors and Enterprising investors. Following is their description by Graham:

“We make a basic distinction between two kinds of investors — the ‘defensive’ and the ‘enterprising’. The defensive (or passive) investor will place his chief emphasis on the avoidance of serious mistakes or losses. His second aim will be freedom from effort, annoyance, and the need for making frequent decisions. The determining trait of the enterprising (or active, or aggressive) investor is his willingness to devote time and care to the selection of securities that are both sound and more attractive than average.” – The Intelligent Investor (By Benjamin Graham)

Although a lot has changed between Graham’s times to the modern investment period, nevertheless the type of investors has remained the same. Even in this modern time, there are two types of investors- an active investor and a passive investor. However, there is also a lot of room between active and passive investors where many investors reside in today’s world. Let us now discuss the key qualities of all these investors.

A passive investor is ‘buy and hold’ investor. Typically, the holding time for these investors is forever. They buy a stock and then forget it for a very long time. Sometimes these types of investors may face huge occasional losses because of ‘recessions’ or ‘market crash’ which they are not aware of as they are not actively involved.

For example, during the 2008 market crash, many passive investors did not take their money out of the market and hence their investments suffered huge losses.

However, in the long run, these investors turn out to be winners. The 2008 market crash recovered after 2 years and those who remained invested for a long time turned out to be the victors in the end.

Recommended book to read: The Richest Man in Babylon (The Success Secrets of the Ancients – the Most Inspiring Book on Wealth Ever Written)

An active investor is a day trader. Day traders buy and sell stocks throughout the day to get profits. As they as actively involved, they are awarded great profits throughout the day.

However, these investors incur many frequent charges due to a large number of transactions. In addition, day trading can also be very stressful, as these traders have to devote lots of time in active trading.

What kind of Investor you are day trader

Fortunately, there are many people whose investment style lies in between those of an active investor and a passive investor. These people are not day traders but are actively involved in the market.

Typically, What Kind of Investor you are depends on three factors. Time, preference and knowledge.

Factors determining what kind of Investor you are:

— TIME

Let us understand this with an example. Suppose you are an employee, have a family &kids. You love to travel and party with friends. Then it is very unlikely that you will be able to give a huge amount of time for investing. You might choose a passive investment strategy. This will give you lots of time to remain actively involved in your personal and social life.

Now, let us take another example. Here, you are highly interested in the stock market and you give plenty of time for your investment. Then, you fall into the category of an active investor.

However, these are not the only scenario possible for investors. For instance, say you are willing to give 5-10 hours per week for your investments. Then, you lie somewhere between an active and passive investor.

— Preference

This is based on your inclination towards the market. Some people are highly interested in the stock market and prefer to give all their free time in analyzing the stock market. Then they are actively involved.

However, if you enjoy having a party in your free time instead of reading the market news or economic times, then you are passively involved. In this case, you do not think about your investment during these times.

There is also a third possibility based on preference. Suppose you like to party in your free time.  Nevertheless, during the party, you also like to discuss the prices of the stocks and their trends with your friends. In this case, you are again somewhere between an active and a passive investor.

— Knowledge

How much knowledge you have also influenced your style of investing. If you are new to investing and do not have enough knowledge, you may be inclined to passive investing. However, as you gain more knowledge, you may prefer to get more actively involved in your investing.

Overall, the style of an investor can be defined by considering the amount of time he has, his desire and preference towards investment and his level of financial knowledge. These three factors can help you determine how actively or passively you are involved in your investment.

Also read: How to Invest in Share Market? A Beginner’s Guide

Tags: What kind of Investor you are, active vs passive investors, What kind of Investor you are active or passive, different kinds of investors

May 6, 2017 Investment Basics 8 comments
6 Reasons Why Most People Lose Money in Stock Market cover

6 Reasons Why Most People Lose Money in Stock Market

6 Reasons why most people lose money in stock market. Many a time while watching the market news you hear the words like ‘Oh, the market is bullish’, ‘Sensex went up 100 points’, ‘Nifty banks are doing great this year’ etc. Then you see your portfolio and talk to yourself ‘Why the hell am I losing money?’

Don’t worry. This is not just your scenario. It is a known fact that about 90% of people lose money in the stock market. But do you know why? Why your portfolio is at a loss when the market is upward, why most of the stocks you bought are underperforming;  why aren’t you able to beat the market? If you go through all these thoughts, then you are one of those 90% people.

So, today I am going to give you top 6 reasons why most people lose money in the stock market. Be with me for the next couple of minutes to uncover this mystery.

6 Reasons why most people lose money in stock market

1. Not doing enough research and investing based on ‘TIPS’.

why people lose money in stock market 1

This is the first and the biggest mistake that people do when they start investing in the stock market. They easily trust the tips they hear from a friend, colleague or from a financial magazine that they just read. Moreover, most people blindly follow the recommendations from their brokerage firm which later turn out to be a major loss on their investment.

Now, you can argue with me that what’s wrong with taking tips and suggestion. Your friends and the brokerage firm has more experience than you and surely can help you in getting good returns. But if you think like that, then you are missing the point. No one else cares about your money more than you do. You can easily rule out the broker’s recommendations as they will only earn when you trade. They don’t care whether you win or lose.  They are getting their brokerage fee as long as you are buying or selling. Hence, they will always try to give you suggestions so that you can trade more and frequent. And the more you trade, the more brokerage fee they will get.

Now, let’s come to the suggestions from the friends and colleagues.  There are few things that a beginner should understand that no one is going to tell them. First, All your friends will always boast about their profits & returns. Second, none of your investor friends will tell you about their losses and bad investments. It’s sometimes a matter of pride. Overall, you will think that your friends or colleagues are always doing great, but they are not. You might take their suggestion thinking that they have researched a lot about that company and they are always right in investing. However, in the end, you will end up losing your money.

Hence, the only way to invest intelligently is by doing enough research before investing. Moreover, it’s not tough to research the company on your own. Finding an undervalued stock is an art which you can develop with practice and patience.

2. Trying to make money quickly

why people lose money in stock market 2

This is the second biggest mistake that people make while investing in stock market. People are always in a hurry to make money. They always want to become rich quickly. Always want to be like ‘Warren Buffett’ – Rich and Powerful. However, what they don’t understand is that Mr Warren Buffett has made the majority of his fortune after his 50’s. It’s a fact that he got more than 90 percent of his wealth after the age of 50 and has accumulated a large sum through his long-term investments for a period of over 5 decades. Success in stock market needs time and patience.

But this is not how the people invest. They enter the market. Then select a stock which they heard on a news channel that ‘It has a huge growth potential’ and they invest heavily in it. Then they pray that their money becomes 5-10 times. However, it turns out that they lost 30-40% of their investment. So, out of frustration, they quit investing in stocks and start searching for another way that can make them rich quickly. This is how the non-achiever in stock market thinks and loses money in the market.

If you want to read, I will highly reccomend you to read the book: One Up On Wall Street: How To Use What You Already Know To Make Money In the Market. This is my favourite book on stock market.

3. Sudden overexposure to market and non-diversification

why people lose money in stock market 3

This happens a lot of time in the stock market. A common person has accumulated a lot of savings over the period. Then he hears how his neighbour has doubled his money by investing in the stock market. Suddenly he also gets interested in share market. He started thinking that if his neighbor who is a Salesman, can get so many returns from the stock market, then why can’t he? Hence, he decides to enter the stock market with a huge amount of money that he has saved during all those years of hard working.

And this is where he fails. The point is, you can enter stock market whenever you want; however, to enter the market without prepared it totally stupid. Think of this like going to the forest without knowing how to hunt. You need to develop the art first. You need to understand the market and enter once you are at least a little prepared.

In addition, non-diversification is also one of the biggest mistakes that most people do. People are so confident about their stocks that they think it’s illogical to invest in multiple stocks which may average out the profits. True, it might average out the profits; but it also reduces the risk. Remember, it’s always about minimizing risk and maximizing the profits. Like over-diversification minimizes the profits, in the same way, non-diversification maximizes the risk.

4. Holding onto losses while booking profits early

why people lose money in stock market 4

Let us imagine a scenario. You have bought 5 shares. Three of them are doing great while two of them are underperforming. What will you do? What will you sell first? The shares that are doing great or the one who is defeating?

‘Sell the winners and hand on to the loser stocks’. The majority of the amateur investors follow this rule. They think that it’s safe to sell the stocks first which are giving them good profits and hold the loser stocks. In this way, the loser stocks will get time to recover and they might get their initial investment back. Moreover, in the meantime, they can get some profits by selling their good stocks.

However, this is the wrong approach. In this way, you are limiting your upper level and increasing your lower level. That is, you are limiting how much you can get profits as you have already sold your good stocks. But, you can suffer even great loss as the loser stocks are still in your portfolio.

If you want not to lose money in the stock market, then you should use the opposite approach. You should limit your lower level and maximize your upper lever. This can be achieved by holding to your winners and cutting your loser stocks.

5. Lack of patience

why people lose money in stock market 5

Patience is the key to success in stock market. The only thing that you need to do in the stock market is to buy good stocks and give it time. This is the only way to make money here.

However, most people who lose money in the stock market do not have patience. Although many of these people are able to find a good stock, they aren’t able to get good profits from them. Why? Because they don’t have patience. They can’t even give 2-3 years time to their stocks to grow. They want a quick result.

However, this is not the only problem with such investors. In some situations when their stocks lose 20-30% of its worth, they become highly impatient and sell their stock quickly. If just they have held their stocks for a couple of months, they could have got good returns of around 40-50% on their investments. Here, the lack of patience misfires on their intelligence of choosing a decent stock.

6. Blindly following the crowd.

why people lose money in stock market 6

This is the last reason that I want to mention that why people lose money in stock market. BLINDLY FOLLOWING THE CROWD.

Imagine a scenario. Your neighbour bought a stock which increased its value by 50% in few days. Then you colleague bought the same stock and the stock has now risen to around 80% appreciation from its initial value. Everyone is talking about that stock and it’s making a lot of noise in the news. What will you do now? All your known people are getting great returns by investing in that stock. Will you invest in that stock too?

If you blindly follow everyone and buy that stock, then you are most likely to lose money. Everyone has some plans and strategies for their investment.  You just can’t read the exit strategy of your neighbour. Maybe when you thought to buy, he was planning to sell the stock in a few days thinking it as overpriced. But you just can’t know this.

What you can do is to read about the company’s fundamentals, its financial reports and figuring out why is it in news so much. And after studying the company completely, if you are satisfied, then only invest in that stock. NEVER INVEST BLINDLY FOLLOWING THE CROWD.

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Apart from the above, there are other couples of reasons also like investing in futures and options, frequent trading, lack of self-control etc that are responsible for most people losing money in stock market.

I hope this post about ‘6 Reasons why most people lose money in stock market’ is useful for the readers. If you have any suggestions or reviews, feel free to comment below. I will be happy to reply.why people lose money in stock market 7

Besides, here is an infographic on why most people lose money in stock market. Feel free to share it with your friends so that they can also avoid loss in the market.

why most People lose money in stock market

New to stocks and confused where to start? Here’s an amazing online course for the newbie investors: INVESTING IN STOCKS- THE COMPLETE COURSE FOR BEGINNERS. Enroll now and start your stock market journey today!

Tags: 6 Reasons why most people lose money in stock market, reasons people lose money in stock market, Common reasons why most people lose money in stock market, why most people lose money in stock market, why 90% people lose money in stock market

May 3, 2017 Investment Basics 31 comments
10 Reasons To Start Investing In Stock Market Today 2

10 Reasons To Start Investing In Stock Market Today

10 Reasons to start investing in stock market: Most of the people at some time have thought to start investing in stock market. However, they are afraid to take the next steps as they have always heard how closed kin or Uncle has lost almost all his money in the stock market.

Since, very long time our family members, friends and media have told us to stay away from the market. The common misconception that ‘Stock investing is like GAMBLING’ has become more of a fact than myth. Moreover, maybe this could be the reason why even less than 2% population of India is actively investing in the stock market.

Hence, today I am going to give you 10 great reasons to break this barrier and start investing in stock market. So, be with me for the next few couples of minutes to enjoy this roller coaster ride that may open your eyes towards investing in stock market.

Top 10 reasons to start investing in stock market.

1. To keep pace with inflation

Inflation is a state where the prices are rising and the value of purchasing power of money is decreasing. Inflation occurs in an economy when there is an expansion of the total amount of money. Overall, Inflation is not desirable for an economy.

Let us understand inflation with an example. Suppose you have Rs 5 lakhs in your account and you want to buy a car, which also costs Rs 5 lakhs currently. Then you changed your mind, deciding to buy the car next year, and kept your money in the savings account. The bank is giving you a decent interest of 5% pa. Now, let us fast forward to next year. You went to the bank and came home happily with your money that has become Rs 5.25 lakhs now. Then you went to the car showroom. But boom! You get the shock. The price of that car has now increased to Rs 5.3 lakhs. The car, which you could have easily bought last year, is now not affordable to you. That is inflation.

The inflation in India for the last few years has been around 4-5%. The return on the savings account (Interest rate) is around 4-6% per annum. Hence, a savings account cannot beat inflation.

inflation rate in india

Overall, if you want to beat inflation, you have to invest your money intelligently. And the stock market is the best place for intelligent investors. If you buy stocks of decent companies, you can easily get a return of between 10-25% depending on how good the stock is and how much time you invested in choosing the stock. Therefore, investing in the stock market is a great option if you want to keep pace with rising inflation.

2. Most growth potential

For the past couple of decades, Stocks and real estate are the two investments, which have constantly beat all other forms of investment. Whether it is bonds or commodities like gold, silver, petroleum, etc. the stock market has been able to outperform all these investments with the best returns on the investments. Hence, with the tremendous growth potential in the stock market, it is always advisable to invest in stocks.

3. Investing makes your money work for you

Money is important. We need money in every aspect of life. Most people say that they do not work for money and money is the cause of most problems. However, lack of money is the cause of most problems and investing is the solution to this problem. If you invest your money in good companies, you just have to sit idly and do nothing. Your money will grow as the company prospers. In the meanwhile, when your money is growing by itself, you can use your time in whatever way you want. In this way, you can make your money work for you.

4. Stock Investing takes as little amount as buying a burger

There is a common misconception among many people that they need a huge sum to start investing in the stock market. However, that is not true. You can start investing with as little money as required to buy a burger. There are a number of stocks whose price is less than Rs 100. You can invest an even very small amount of money and start getting good returns. This option is not available in other for other forms of investments like gold or real estate. In addition, remember a little bit of things every day ads up to a big result.

5. You do not need to be a genius to invest in the stock market

peter lynch quote investing

‘If you can understand 5th standard math, then you can understand stock market’- Peter Lynch.

Lynch is one of the most renowned fund managers famous for giving around 30% return for a continuous period of 13 years at Fidelity. He always motivates common people to invest in stocks and believes the stock market is for everyone. You do not need to be a mastermind or rocket scientist to invest in stock market. Unlike starting most business or start-ups, the stock market requires only a little money, math, time and interest. Anyone can get huge returns by investing in the stock market.

If you are new to investing and want to stay away from common myths and mistakes in stock market, I will highly recommend you to read this book: One Up On Wall Street: How To Use What You Already Know To Make Money In the Market. It is one of my favourite books on stock market.

6. Stock investing is a lot easier now

It is easy to invest in stocks in India now and hardly requires any expertise to buy stocks online. Trading with the online brokerage account is a lot simpler now. Moreover, with the increase in financial websites and apps; finding and selecting stocks is also easy now. You do not need to go through all the boring financial newspapers and magazines now and need not rely on newsletters to get the company’s financial reports now. Now, you can easily find them on the company’s website or on financial websites.

Also read: How to Invest in Share Market? A Beginner’s Guide

7. Tax benefits from the government

There are a number of tax benefits in investing in stock market. India has the provisions of tax-free return from equity, in case share is held for more than 1 year. The long-term capital gains tax in India is zero. From the updated rules in Budget 2018, the long-term capital gain tax is 10% for gains exceeding Rs 1 lakh. Still, this is better than the return of 6.5% from FDs, which is again taxable up to 10-30% depending on your tax slab. That’s why it is a popular quote- ‘The rich pay less tax’.

8. You do not always have to pick hidden gems.

Everyone knows about Eicher motors, the parent company of ‘Royal Enfield’. The company makes famous ‘bullet’ bikes. Many old and young people have a dream to own a ‘bullet’. If only people have bought a large volume of stocks of ‘Eicher motors’ when it launched the ‘Royal Enfield’ bikes, they would have been a millionaire by now. Eicher motors have given around 129,000% return since 2002; The price appreciated from Rs 22 (in September 2000) to Rs 29,000 current price (May 2017).

There are a number of other examples of common stocks as well that has given more than several hundred percent returns over the last few years. For example, Symphony, Suzuki, HPCL, Titan Company, etc. These companies are well-known to the common people. Overall, people can easily find such growing companies around them. Even a famous company like Titan can give you great returns. You are not supposed to find very rare and un-heard petroleum or metal company. You just have to be willing to look around enough and notice them.

9. To create a secondary source of income

It has always been taught in our school- ‘Get a high paid safe and secure job’. What is not taught is what will happen if the company is shut down or you are fired. We should always have a backup. For the public in India, stocks help to create this additional source of income. Most of the people are entirely busy with their office their entire life. For those people, Investing in the stock market can be their second source of income. Through value appreciation and dividends, they can steadily grow additional income. That is why people need to start investing in the stock market.

10. The power of compound interest

Stock Investing allows you to take advantage of compound interest, which grows your wealth exponentially. Most of the bank savings account gives you a linear simple interest. However, with investing in stock, you can get compounded returns. The famous scientist Albert Einstein once said- “Compounding is the eighth wonder of the world”. The world’s greatest investor, Warren Buffett, is known to have a compounded return of around 22% for the last 5 decades. Moreover, this compounded return for a long time has made him one of the richest men on earth. The power of compounding is one of the major reasons why people should invest in stock market.

Apart from these 10 reasons, there are also other couples of reasons to start investing in stock market. Nevertheless, they are out of the scope for the beginners and you can only realize them once you enter the stock market world.

That’s all. I hope the post is useful for the readers. If there is an additional reason to invest in the stock market that I missed or you want to add to the list, feel free to comment below. I will be happy to include them also. Happy investing!

New to stocks and confused where to start? Here’s an amazing online course for the newbie investors: INVESTING IN STOCKS- THE COMPLETE COURSE FOR BEGINNERS. Enroll now and start your stock market journey today!

Tags: 10 Reasons to start investing in stock market, Reasons to start investing, Reasons to start investing in stock market, top reasons to start investing,

May 2, 2017 Investment Basics 8 comments
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