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Stocks: The easiest way to build wealth? - Views on News from Equitymaster
 
 
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  • Jan 4, 2010

    Stocks: The easiest way to build wealth?

    The stock market has fascinated people for over a century now. Stocks are even seen by many as the quickest way to get rich. However, there are indeed very few investors who see the stock market and stocks in the right perspective. To most, they are just tickers of prices going up and down. If your ticker goes up, you make money. If it goes down, you lose. That's both the start and the end of the story.

    But the thoughtful investor is more discerning than that. He looks at stocks not just as quotes going up and down, but as real, live businesses in action. Go one step further and one realises that stocks can be one of the most fabulous asset classes to invest in. They are a vehicle and mechanism that provides ordinary individual investors with some amazing advantages and opportunities. Advantages that are unparalleled by any other asset class.

    Here's 6 reasons why if you've not yet invested in stocks, you will definitely want to make a start this year -

    Opportunity to own an existing business: Imagine you are more inclined to doing business rather than settling down for a fixed income. To start your own business, even a small one, you will require a tremendous amount of investment. This will not only be financial investment, but also the fact that you will have to spend your entire time in establishing, operating and managing your business and your employees. And if you are starting your business from scratch, the most important question arises. Will the business work? Will it make money?

    When you buy a stock, you get to buy a stake in an already existing business with the huge advantage that business already has all its employees and infrastructure in place, and is already up and running. You straightaway get a claim on the businesses future profits (in your proportion of ownership) without any of the headache or effort involved in running it.

    Liquidity: If you actually decided to open your own business, and found that it is losing money and you do not want to own it anymore, selling it is going to be a big problem in itself. You can either sell it as a going concern, in which case you have to find a buyer, or then you could liquidate it by selling all its assets individually.

    The same applies to most other asset classes. Even real estate for that matter. If you have bought or sold a house before, you will know the kind of personal effort and time that goes into the transaction. Investing in commodities also has its own set of hassles.

    But in buying stocks, you instantly rid yourself of all the above problems. You can instantly buy and sell your stake in the business with a single phone call or a few clicks of your mouse.

    An astounding amount of choice: If you're the kind who loves to have a good range to choose from, the stock market is a dream come true. The market gives you an amazing choice of pre-existing businesses to choose from. There are about 5,000 stocks listed on the Bombay Stock Exchange. Their financial and business details are all public, for you to scan, evaluate and judge.

    You can buy only if you really like something. It would be a mere truism to say that you will try to find the most profitable business being sold at the cheapest price. But the point is that the stock market puts you in a position where it enables you to make such a choice.

    Little money required: Think about this. Even if you plan to start a small grocery store in your neighbourhood, you will put in respectable amount of capital. That essentially means that you will necessarily have to stake such a large amount of money on the success of just one venture that may or may not take off as you have planned.

    Compare this to buying a stake in a business in the stock market. You can pick up the same with even a few hundred rupees, let alone lakhs and crores. And you have the chance to spread your total investment across many businesses. In this way, even if something were to go wrong with one of them, you would still not have to bear the brunt of your entire capital going to the dogs.

    No hassles of negotiations and brokerage: You are completely rid of many messy tasks that come along with buying and selling traditional asset classes like real estate. You are free of things like negotiating a price for the sale, negotiating the brokerage fees which can be quite high, other legal and documental procedures. With stocks, the price is right there for you to see. No hassles of negotiating with the opposite party. The brokerage too is low (usually a maximum of 0.5%). This helps ensure that a lot of your investment is not eaten up by frictional costs that you would otherwise incur for documentation, legalities and hefty payments to brokers.

    The prospect of a higher return: There is one thing that is at the very core of choosing to run a business instead of investing your money in a bank fixed deposit. And that is the expectation of the higher returns on your investment. If an FD yields you 7% on your investment, why bother with the extra risk and responsibility of owning and operating a business if it does not give you substantially higher returns? Thus, businesses usually strive to earn returns much higher than your run of the mill investments. The trick is to buy a stock that has shown that it can do the above with reasonable certainty, and to buy it at a good price.

     

     

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