Investing in stock market is a major step towards wealth creation in one’s life.Markets are always considered to be a better channel to achieve an individual’s long term goals of creating corpus and to be a millionaire.
Almost everybody ,familiar to some extent to the financial markets , may have a perception that you put money in the markets and it multiplies several folds.This is because the common thinking is that you buy shares and sell shares and earn huge profits.
This is true but the real test is when the time comes to apply this notion.Confusions start arising when you have prepared yourself to take equity exposure.
Want to be a Millionaire – what,when and how much to buy ?
Answers to these simple questions require very meticulous planning and a careful evaluation of the stock company you want to invest in. This is because when the markets are in cheerful mood it appears an easy task .
But when the markets start falling,they have the tendency to throw shivers through the body of an even an experienced and educated investor.We would try to understand all this phenomenon in this article.
To start your journey towards wealth creation and to become a millionaire, first of all you have to decide the time horizon for which you can remain invested.Usually it should be minimum of 5 years.
Longer the time period you give,the better the results are.So,you should always approach the stock market with long term view.It is the long term investment that creates wealth.Remember,trading is only for short term small gains.
How to pick a stock for investment ?
When an investor thinks for an investment , he has two motives ; wealth creation by capital gain and regular income as dividends over the period of investment.
Keeping this strategy in mind , a stock is selected . Hence , we always need to pick the stock of a company of that sector where the the growth is visible in future.
The company should have high growth revenue and high Price to Earning Ratio (P/E multiple). P/E values you can find on the balance sheet of the companies which they present quarterly while declaring quarterly results for that company.
To have regular income , high dividend yield stocks are preferred . These companies are known to give regular dividends to its investors.
Dividend is the certain percentage of cash given to the investors by the company out of its profits earned.However, a company is not bound to declare dividend.
Dividend can be given during the year (interim dividend) or at the end of the year (final dividend). Your investment becomes a regular source of income also along with the growth of capital.
Other important things to consider while selecting a stock for investment is that if the management of the company is competent , has clean image and is not involved in unnecessary controversies.
How to invest ?
Better strategy to Invest in markets is in a staggered manner.Allocate an amount you are comfortable in investing on weekly,fortnightly or monthly basis and continue with that in a disciplined manner just like the SIP or Systematic Investment Plan.
SIP is provided by the Mutual Fund Companies. These are provided as Equity SIP by some brokers .
Discipline in investment means that you have to continue with your investment as per your schedule without bothering if market is going up or down.
Risk of buying in lump-sum is that you never know whether you are buying at the top of the market or at the bottom.This risk is neutralized by investing in staggered manner.
Advantage of long term view on investment
As we talked above, we should keep long term view for equity investment.The major advantage of longer period is the ‘power of compounding’ which the investment generates.
More significantly,the long term equity investment become eligible for Dividends and the Bonuses the companies declare. It adds towards our achievement of goal of wealth creation.
Moreover,companies also declare bonus when they earn good profits.Bonus is allotment of stocks in addition to your number of stocks purchased.It can be in the ratio of 1:1,1:2,2:3 or as the company decides.
Let’s take an example of Indian IT bellwether company, Infosys Technology. This is a perfect example to show how stock investing can help you in becoming a millionaire if you keep patience.
Suppose,you would have bought 100 shares of the company for ₹ 9500 in 1993 and kept it with you till 2010.Can you imagine,how this investment would have panned out in this period and have created wealth for you?
In Table 1, you can see the dividends and bonuses declared by the company throughout this period.Considering only the dividend pay outs,it amounts to nearly 32,00,000 ( see Table 2 ).
Now, in 2010, the Infosys stock was trading at around 2500 and number of shares increased to 85,500 from meagre 100 after adding all the bonuses and the stock split. Here,capital gain amounts to whopping 12800*2500= ₹ 32000000-9500= ₹ 3,19,90,500.This is a stunning picture but true.
So, investing in good quality stocks with good future prospective and keeping that investment for longer periods is always rewarding and helps you achieve your goal of being a millionaire when compared to any other asset class of investing.