Lesson 1 of the Start Stock Investing E-Course
We start our investing journey with the following topics.
Start savings first
Yes, I know, you might wonder why I am talking about savings if I am talking about investing. I cover savings first because it is easy to live beyond our means in the short-term. Credit cards ready to be whipped out for shopping. Impulse purchases of gadgets and clothes. Many regret it later.
If you find yourself agreeing that expenses need to be under control, half your battle is won.
To invest, you need to save first.
Action plan to start saving
A few things that will be useful to follow are given below.
- Jot down your expenses for the month as you incur them. If you hate pen and paper, today there are mobile applications which give you this functionality for free.
- Go back to this list a few months after you have started it.
- Ask yourself, whether you could have done away with a few expenses.
- Next time you buy something, consider whether you really need it. For example, I see a lot of youngsters fresh out of college with a smartphone that is worth more than Rs. 30,000 in their hands. I can get a brand new laptop in the same price.
- I accept that each of us will live our life the way we want to. What works for you and me will be different. Nevertheless, a re-look at your personal finances and your spending patterns will surely be useful.
Why should you invest?
At the core this course is about money. Yet, the answer to this question is anything but money. We have needs and aspirations in life. You should invest to grow your wealth, so that you can satisfy these needs and aspirations.
Maybe you want to build a corpus for your children’s education. Or you think that your parents should see the world and want to book a foreign vacation for them in the next 5 years. It can be building a home for your family.
A villain in the story – Inflation
Inflation can badly affect your wealth growth though. It is the bane of all investors. With successive governments that do not balance their spending and revenue, and money supply in economy which expands too fast, India is bound to continue suffering from rising prices of all the goods and services that we buy. And this is not only in India. This is the case in most countries, the world over.
And why should inflation bother you?
If you earn 8% interest in your bank fixed deposit while consumer price inflation is at 10%, your returns are -2%. You are losing your initial capital investment year after year. And I am not even considering impact of tax. That would make it worse.
Do you feel that you progressively need to keep running more just to stay in the same place where your wealth is concerned? It’s probably inflation that you are fighting with.
There is a difference between “real” and “nominal” growth. In the case above, we got nominal growth of 8%. Real growth is -2%.
Stocks, equity, share market, demat and trading accounts
I was attracted to the stock market in my MBA days at IIM Indore. I am thankful that I got exposure to the stock market at an early age.
Stock investments in the long-term can help you beat inflation and grow your real wealth! Have a look at the chart below where I compare fixed deposit returns, BSE 30 index return and inflation. Over the last 20 years, the stock market is a clear winner. And here is the the interesting part. If you select great stocks, your returns can be better than the stock market.
Can you become a smart stock investor?
The answer is a big YES!
You do not need a fancy degree. You need common sense and understanding of finance concepts.
You need to devote time and effort regularly. Like any other activity, you get better at investing with constant learning and application of knowledge.
I am sure that you are ready for some effort. Why?
- There is no free lunch.
- If you do it right, the rewards are really worth it.
- You want to satisfy your life goals.
Insurance – protect yourself and loved ones first
I will digress slightly from talking about investing and talk about insurance now. Why?
I want you to be completely secure before you think about investing.
Life insurance should always be bought if you have dependents. If you are no more, you surely would want your dependents to continue living the same lifestyle as before. Please ascertain the amount you want to leave behind for them. Take a life insurance policy and add the names of your dependents in the policy.
You might say that the company you work for already has got you covered under a life insurance policy where they are paying the premium. Or that they deduct premium from your salary. Losing jobs is not uncommon as was seen in India during the 2008 credit crisis.
You might be in a situation where you are without a job. With no life insurance cover.
I am not trying to scare you. When you buy life insurance you are not wishing that you die either. We have to think of all the things that can go wrong. Think practically. I think it is wise to take a policy independent of whatever your company provides.
The same logic applies for medical insurance policies. Costs of hospital stays, operations and medicines are rising faster than anything else, as you would accept. You or your family member might recover from a debilitating illness or disease, but the costs of treatment might “kill” your wealth. We all have heard of someone who was admitted to a hospital suddenly. They have been cured or treated but they had to pay multiple lakhs of rupees to get better.
We don’t know when our health may suffer. The least you can do is protect your health by being able to afford the right treatment. Protect wealth by availing of medical insurance.
The same logic of only relying on your employer, like I explained for life insurance, also applies to medical insurance.
I know of people who invest huge amounts in the stock market and other avenues but have no insurance cover. Protect yourself first. Then start investing.
You might feel that I have taken an unnecessary detour from investing. But I truly feel what I wrote about this topic. Safety comes first. Both, in life and in investing!
Lesson 1 – Summary
- Start saving first.
- Never ignore inflation. Focus on real wealth growth.
- Stock investing can deliver returns which beat inflation.
- Stock investing needs your time and effort.
- Before you start investing, protect yourself and loved ones. Buy requisite life insurance and medical insurance.
This is Lesson 1 of the Start Stock Investing E-Course by Capital Orbit. We will delve deeper into the world of stock investing in the Lesson 2.
Recommended reading on long-term stock investing
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