I’m sure you’ve heard stories of how someone you know made a ton of money investing in stocks. Then again I’m sure you’ve heard stories of how someone’s lost a ton of money investing in stocks. We all know how risky investing in the stock market is. As I was growing up the Harshad Mehta scam hit the markets and lots of people lost their shirt. In recent days you might have heard stories of how people lost their money on Yes Bank or DHFL or IL&FS or even coffee day. How thousands of their hard-earned bucks disappeared into thin air. Yet despite all this news Stock markets have consistently created wealth for investors across the world. Is it possible to generate wealth from the stock markets? Is there a way to navigate its highs and lows and crashes? And if so, what’s stopping you from tapping into this incredible source of income? Laziness? Fear? Well today let’s try and demystify stock market investing so that you can Get off your ass. Make more money. Invest in equities.
What are equities or stocks
The words Equities or stocks are used interchangeably. What they mean is shares in a company. What is a share? Fractional ownership of a company. Let’s put that into perspective. Let’s say there’s an imaginary company whose net worth is 100 rupees. Now the owner of the company wants some additional funds or wants to dilute ownership of the company. He splits the company into 100 shares of 1 rupee each. You think this company has great earning potential, so you want to buy into this company and become a part owner. So, you buy shares from the owner at rupee one a share. So, if you buy one share you own 1% of the company. This is an oversimplification but effectively that’s what a company’s share gives you.
Have people made money on stocks?
Contrary to popular belief yes. Take the Sensex for example. It’s a 30-stock index of the top equity stocks in India. From its launch in 1986 at 100 points till April of this year when it hit 39000 points for the first time. Calculate the growth. Considering dividends, it should have been around the 56,000-point mark. Over the last forty years that’s an CAGR of 17%. No other investment class not even gold has given such returns. Now think of how much money you would have made if you had invested in the SENSEX in 1986. Even let’s say a thousand rupees. Now think about how much money you’ve not made that you haven’t invested those thousand rupees. Well if you’re not invested your returns are 0. So, don’t sit out by not investing in one of the most consistent wealth generating machines ever. The past is past. Look to the future.
Ok so why do people lose money on stock?
Many reasons. Mostly because of a mismatched risk return and exposure to systemic risks. What I’ve said about market growth has been of the overall market. That does not mean there aren’t companies or entire industries that have gone bust. Your shares are only worth something if the company you own is doing well. If the company ceases to operate your money is gone. Take for example Kingfisher Airlines. When it listed on the markets in May 2006 via an IPO, it listed at a share price of 130 rupees. At its heights in Dec 2017, it touched 316. After that it crashed.
Now let’s say you invested during the IPO and sold your holding at the high of 316. You would have made a lot of money. On the other had. If you Bought at 316 and held on through the crash, you would have lost your money. Remember in the first paragraph I said the stock markets generated wealth for investors. If you are a trader there’s a possibility you make money. There is also the possibility you lose money. a ton of it. If you’re a well-diversified investor, over the long-term, historical data shows you’ll make good money.
How can I reduce my risk on investments in stocks?
Mutual fund returns are subject to market risks. Read all scheme documents carefully. Sounds familiar. This used to be the disclaimer after ads for MFs on TV. And it is still true. The market risk is where people lose money in Stocks. What are market risks? Risks that the entire market will experience a sudden fall and your capital will be eroded. Can you get wiped out due to market risks? Yes, you can. Buying and selling at the wrong time can tank any portfolio. But if you are careful its more than likely that you won’t. You might have to take a haircut or a short-term notional loss. But you definitely will not end up losing your shirt.
So there are 2 strategies I would recommend to mitigate risk in stock investing
1. Invest in a direct Active Mutual Fund with good history
A mutual fund is basically many people who don’t know much about investing coming together are giving their money to a person who knows how to invest. The Fund Manager then takes the large pot of money and invests on behalf of the people who given him the money. What’s the advantage you ask me. Well there are several MFs with different products. Usually the Fund Manager will have specific sector expertise he leverages. The MF will also tell you what they are investing in. And will charge you a fee to invest. They know the sector better and ideally won’t make the rookie mistakes you will. The fund manager will use their knowledge and buy undervalued stocks and sell when the valuation improves. The goal is to give you better than market returns. Effectively your capping your downside.
Do pay attention to the advisor fees structure and invest in Direct plans for Mutual funds when possible. Over the long term a 1% saving in fees could add up to millions on a large portfolio
2. Invest in a broad market Index Fund or ETF
An index fund is a type of mutual fund with a portfolio that tracks and matches the components of a financial market index. What that means is the fund buys the same shares and in the same proportion as the index. They provide you with exposure to the wider market, low operating expenses and low turnover on your portfolio. This kind of investing is making a comeback for its passive investing style that a lot of people are attracted to.
Ok I am convinced, take my money and tell me how to invest in stocks?
Wohoo. So you’re ready to bite the bullet but how do you go about investing in stocks. Well there are 3 types of investing
1. Outsource to an Independent Financial Advisor or directly buy Mutual funds
Find a good and honest Financial Advisor and outsource your investing to them. Which financial advisors to choose is up to you. There are two varieties out there. There are advisors who don’t charge you any fees and then there are Fee only advisor. A fee only advisor will charge you fees for their advice but will not make any commission on the investments you make. If you google any Mutual fund plan, you’ll see two options. One a regular plan and one direct plan. The Regular plan will have a slightly higher fee. That is the commission that the agent makes, and it usually is a recurring commission. So, it sucks out a little from your portfolio. But over time that can run into millions. So be careful. The Direct plan on the other had is for people who are purchasing their funds directly from fund houses. Cheaper and better in the long term.
I recommend finding a good fee only advisor Taking their advice and implementing it by buying direct plans of the funds they recommend. Save you a ton of money in the long term.
The other option is to invest in Mutual Funds on your own. Here you outsource your investing in individual stocks to a mutual fund. It still means you need to research and find a good fund to invest in. Check the fund performance over several years, not just the last year. I got burned investing in Principals tax savings fund based on a decision like that.
Either way this is one class that everyone needs to invest in. There is a type of fund called an ELSS Equity Linked Savings Scheme. ELSS funds are locked in for a period of 3 years but they give you the benefits of a saving on taxes as they are classified as section 80 C instruments. You should try and max out your 80 C benefit each year and a chunk of it should be in ELSS funds. So keep this weapon in your repertoire
2. The Passive index fund /ETF investor
Here you either invest in index funds or in ETFs. An index fund is a Mutual fund that invests in a specific Index. You Buy in or redeem them like regular Mutual funds either via MFU or via the individual fund houses.
ETF or Exchange traded funds are index funds, but the difference is they allow you to buy units from the stock market. They give you the wide exposure you need and the flexibility of buying or selling even a single unit. No exit load or any of the other downsides associated with MFs. The catch is you need to have a demat and trading account with a stockbroker.
3. The Active Trader
Here you decide which stocks to invest in. You take the time to study the markets. Build and back test your system and start buying and selling individual stocks. Youll have to understand the intricacies of the human psyche. As well as the way the market behaves to news, rumours and the million other factors that can cause the market to go up and down. But there are some traders who do make a lot of money out of trading. If you’re interested in this, I would recommend reading Benjamin Grahams The Intelligent Investor. It will give you the flavour of how trading works. After That I recommend you sign up to one of the Virtual stock market trading platforms and see if your strategies can actually make you money. After that if you are convinced get a brokerage account and start trading with real money. Remember to account for fees and taxes when your trading. STCG in India is a B*tch.
What platform should I use?
1.Mutual Funds Investor
Great, like I said previously do your research on a good fund to invest or get the advice of a good IFA. But once you’ve done your research you can either simply buy the fund through the website of the fund you’re looking to purchase or do what I do. Use MFUtilites. What is MFUtitlites or MFU. Well its kind of like a shared portal of a lot of mutual fund houses that lets you invest. The advantage is that you can get exposure to almost all the fund houses. Plus, you’ll be able to see all your holdings of those fund houses in one place. Easier tracking as compared to going to each individual fund house and downloading and reconciling your portfolio. Oh, and did I mention that all of this is at no additional cost. Things that can save you time and money are things I like. You will have to go through a registration process and complete KYC. But you’d have to do that regardless. Yes, their web interface is not slick and has a steep learning curve but its served me well. You can head on over to MFUtilites and register for their e-CAN (Common Account Number) using this link.
2. ETF investor
So who do I use. And I think this is an even bigger no brainer than MFutilites. Zerodha is my broker of choice. They have ultra-low costs and have disrupted the discount broking scene in India. The Account will allow you to trade in other equities as well, so you have to reign in your temptation. KYC and registration will have to be done. And there is a minimal annual maintenance charge. You can click this link and sign up for a Zerodha account.
Once you’ve set your mind on becoming an active trader, you’ll need a platform that keeps fees low and keeps upgrading its technology. I give you Zerodha. Besides their ultra-low costs, they are constantly innovating in the value they bring you. Algorithmic trading, GTT orders, small case purchases, the list is endless. You can also set up your account to trade in commodities, options and futures. KYC and registration will have to be done. And there is a minimal annual maintenance charge. You can click this link and sign up for a Zerodha account.
* WARNING * Risk Management
Please note I said investors make money in the stock market. The markets on a day to day basis are volatile. You’ll see a lot of fluctuations on a day to day basis but if you see the long-term trend they are up. If you think you’ll invest today and be out with a ton of money by the weekend you need to think again. Stock markets are a long-term bet. You need to have the gumption the courage and the will power to stay invested when the markets drop out from under your feet. Don’t be the prodigal bought high sold low types. And don’t look at periods of less than 5 years. So, the money you’re investing in stocks, shouldn’t be money you will be needing within the next five years. Secondly, get the idea out of your head that you can lose all your money in the stock market. If you have all your money in 1 stock yes, it’s possible. Else if you are diversified it’s only possible when the entire stock market crashes to 0. Very highly unlikely. And if it does happen it’s the end of the financial world as we know it. Invest after you understand the risks., this document is like a primer. Do your own research on the concepts here validate your ideas and then take the plunge. After all it’s your money and not mine.
What Platforms do I use? And what funds do I invest in?
Well I use both Zerodha and MFUtilites. MFUtitlies for ELSS funds and Zerodha for the ETF and individual stocks.
In terms of specific funds, I invest
1. ELSS Axis long term equity fund via MFU
This fund has outperformed the market consistently for several years and I’ve made excellent returns from it. My ELSS investments will continue to go in here.
2. ETF ICICI 500 via Zerodha
This is a broad-based market ETF with the top 500 companies trading in the markets. It is also the only fund that gives you such wide exposure. The other closest in terms of fund width I could find in others was 100 companies.
Woah that’s one long read. Thanks for staying till the end. If I’ve managed to impress on you the importance of having equity in your portfolio mix, I think I’ve achieved my goal. One more suggestion is to couple thought with action. There’s only so much you can obsess over which is the best fund to invest in and miss out on the market rally. Put your funds to good use today. It’s better to act with limited intelligence then be paralyzed and keep waiting for perfect information.
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