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:

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“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.””

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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!

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

How to create your Stock Portfolio?

An intelligent investor should know the importance of a well-diversified smart portfolio. Whether he is investing in stocks, bonds or mutual investment, he always chooses his portfolio smartly. Although most people have a different strategy for creating their portfolio, there are a few main points that should be taken care of while creating your portfolio.

Portfolio Diversification

A smart portfolio is the one, which maximizes the profit and minimizes the risk. The first step of creating an intelligent portfolio is ‘Diversification’.

What diversification means, in general, is to buy stocks from different sectors (Banks, autos, FMCG, energy, IT, etc) rather than buying a single or two stocks of huge amount. In short, it can be explained by the old saying- ‘Don’t put all your eggs in the same basket’.

While many people argue that, it makes a lot of sense to invest a huge sum of money on a sure-shot stock (which you are too confident about- example Microsoft, which gave 10 times or more returns). However, we like to differ from the argument.

There are various reasons we can give you to support our conclusion.

First, you never know which stock is next Microsoft. Stocks like Microsoft are only a few among more than 5000 stocks in the stock market. If by any chance you made a mistake or if by bad circumstances, the company is not able to perform as expected, and then your whole sum of money will be in vain & you may be in a tremendous loss. Second, for investing in such a company, you need to be 1000% sure. You need to do a lot of intense investment about the company (which is generally not possible for a retail investor), but if you have a diversified portfolio you can slight risks if you are confident about your other stocks.

For example, if you have 10 good stocks, you can be certain that most of them (8-9) will outperform the market and give you a good result. 1-2 bad stocks in a group of 10 will not affect your overall portfolio. However, in the case of a single stock, it is either win or lose.

If you want to learn more about stock market investing strategies, I will highly recommend you to read this best-selling book: One Up On Wall Street: How To Use What You Already Know To Make Money In the Market by Peter Lynch

Therefore, in this post about How to create your stock portfolio, we suggest our retail investors invest in a diversified portfolio. Do not buy 1 lakh shares of just one company in your portfolio.

The advantages of a diversified portfolio:

  1. Diversification helps you in giving liberty to choose a variety of stock. You need to do extraordinary in all the stocks you choose. If most of the stocks are performing well, then your portfolio will overall be in profit. Like the legendary investor Warren Buffett said ‘You only have to do a very few thing right in your life so long as you don’t do too many things wrong.’
  1. Sometimes some sectors underperform and because of which the stock will underperform. Say, if the bank sector is not performing then your bank stock will be in loss. However, it is very less likely that all other sectors (IT, autos, FMCG etc), will also not perform at the same time. During such times, diversification can help you to remain in profit withholding the stocks of other sectors.
  2. Further, if because of some unpredictable reason, one of your stock is not performing well, but you are confident that it will perform well in future, you can still keep the stock on the stake of your other good-performing stocks. You just need to balance out and be overall in profit. [In undiversified case, if your stock is not performing, you will be in overall loss and which might lead you to sell that potential stock.]

Hence, form the arguments that we just put forward, you must follow the diversified portfolio in the stock investment in order to minimize your losses.

How to create a diversified stock portfolio?

Now, we will give you an example of how to create your stock portfolio using diversified portfolio strategy so that you can get an idea of how to create one.

 

 

Stock Name Sector Price No of Stocks Investment** % in Portfolia
BPCL Oil & Gas 713.12 20 15000 21.28%
IndusInd Bank Bank 1334.22 10 13500 19.15%
Hero Motocorp Auto 3163.05 2 6300 8.94%
Tata Motors Auto 460.20 10 4700 6.67%
Infosys IT 990.45 10 10000 14.18%
Tata Steel Metals 485 20 10000 14.18%
Emami FMCG 1077.55 10 11000 15.60%
Total 70500 100%

**Investment is not just Price X (no of stocks). It also includes other charges like brokerage charge, transaction charge, STT, service charge etc.

Quick Note: 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!

There are other important points in our discussion about how to create your stock portfolio, which need to be taken care while creating your portfolio, and will be discussed in subsequent posts.