Stock Markets and Mutual funds
Most men would rather die than think, and they do. -Bertrand Russell
Most financial decisions are either taken in a hurry or late or worse never taken. The rationale behind every investment decision is to beat inflation and earn a premium on the principle. Do the large numbers of investors1 see their decisions in this light? Well, your guess is as good as mine. And, most importantly are they disciplined financially? And, more importantly these large numbers are only thinking a year or two ahead. Not on creating wealth in the long run.
How would normal people like you and me create wealth? Well, my answer lies in the stock markets.
I would highly recommend all the young people to take a serious look at the stock markets and try to understand them. The more you start to understand the stock markets the more you will understand your country’s economy, and nowadays with the close knit framework of the financial markets worldwide, consequently the world economy. A question may arise to what purpose? Well, that is what I will try to explain here.
Most of the young people get into the stock market either working for a financial firm or through the mutual fund route. And I can’t help but question why not a direct entry? Well, the answer to that question can be answered in on word FEAR. The fear of stock markets is that every individual has because they have seen so many people lose money on the bourses. But, also remember that for every ten losers there is a winner. Why not concentrate on him.
Entering the stock markets through mutual funds is good but in the long run would result in a loss of huge opportunity costs which the returns from it cannot justify. How?
1. Whenever a person buys or redeems a mutual fund the company levies a entry load or an exit load whatever the case may be which when compared to the stock market broking charges is very high. Well, on entry the person starts losing on the opportunity that those extra rupees could in course of time generate for him. Let me illustrate with and example. Persons A and B both have Rs 10,000.00 a buys a mutual fund with an entry load of 2.25% and B invests in the stock market with the brokerage of .50%. now, if both of them stay invested for 25 years at an annual compounded rate of 12 % at the end of the period A would have Rs2,44,675 and B would have Rs 2,49,050 a net difference of Rs 4,375 the Rs 175 that B save don the transaction compounded to Rs 4,375 in 25 years. The difference gets bigger as the amount, the time and the rate increase. And history shows that mutual fund can never beat the markets frequently. One of the main reasons is that the funds frequently enter and exit stocks resulting in huge transaction cost eating your wealth.
2. Both the routes eventually carry the same amount of risk, because the fund is ultimately depended on the markets.
3. Why let you money be managed by other people, when you can earn the money you surely should have the capability to manage the same.Don’t get intimidated by financial professional they are as good as you in picking stocks if not worse. There is no way that they can predict the movement of the market than you can.
But, of course the potential for returns is higher in the stock markets and so is the risk. It is not difficult to invest in them, not that it is easy. But, with a little patience and little amount of hard work can take you a long way in the markets. Men will always believe what they will. So, caution should be applied while investing in the markets. But, the younger you start in the market the more wealth you can create.
There are few suggestions to get you started.
1. The first being patience and faith in your investments.
2. Always choose a company which has a simple explanation of its success
3. Never buys a stock just because the price is moving up.
4. Research a stock before buying into a company
5. Understand opportunity cost
6. Appreciate compound interest
7. Let time be your friend
8. Do not get too greedy.
These are the points to get you started .the earlier one can start the chances of creating wealth improves. Have courage to step in to the markets. Most people fall for the multi level marketing scams and fail because they think it is a get quick rich scheme. Now, the stock markets are a similar place. It is not a get quick rich scheme, but a place to understand and invest i.e. buy into business and grow with the company.
In my view the young population should invest at least 50% of their earning in the stock market. And, also cultivate a habit of saving. The hard work that will be put into researching companies will pay off handsomely, and nowadays we have the internet to make it easier for us to research quickly.
Think!
To be continued…
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