Almost everyone secretly dreams of being wealthy. Even the most non-materialistic person would never turn down an opportunity to earn enough money to live comfortably for the rest of their lives. Unfortunately, it is almost impossible to become “wealthy” with a standard 9-5 job unless you have an extremely lucrative business of your own. It is no secret that you need to invest your money wisely in order to become wealthy someday - either into your own business venture, into real estate or commodities, or the stock market. For people outside the finance industry, the stock market seems like a daunting space which is difficult to make heads or tails of. But there is no denying that investing your money in the stock market is one of the easiest ways to grow your money.
Let’s take a look at the stock market and whether investing your hard-earned money in it is a good idea or not.
What is the Stock Market?
The stock market is essentially a marketplace where anyone can buy and sell “shares” of a public company (commonly known as PLCs). A “share” is a small part-ownership of a company which is made available to the public to buy. When the company earns profits, the owners of these shares (known as shareholders) can also earn profits by way of dividends issued by the company. When a company is profitable, these owners can sell their shares at a higher price than they bought it for which is another way of earning returns on their investments. Another factor that drives up the share price is when many people try to buy a company’s shares; this means that shareholders can earn money through their shares even though the company might not be performing very well in real life. Buying and selling shares looking to make a profit from the value difference between the buying and selling price is known as “trading”.
What do you mean by investing in the stock market?
Let’s look at an example.
You decide to invest Rs. 10,000 by purchasing 500 shares of a company (at Rs. 20 each) and the company continues to perform well. More and more people decide to buy shares of this company, which drives the share price up to Rs. 25. Your initial investment is now worth Rs. 12,500. You can decide to sell your shares now and make a profit of Rs. 2,500, or you can hold onto your shares in the hope that the share price goes even higher. However, there is a risk of the share price dropping back to Rs. 20 in just one day or even lower, which means you risk not only making no money but losing your initial investment.
Benefits of Investing Your Money in the Stock Market
No Barriers to Entry
There are very minimal barriers to entry to stock market investments. Nowadays, there are mobile apps where you can just create an account for yourself and start buying and selling. You would need to select a broker but you can do the actual trading yourself.
No Minimum Investment Required
You can even start trading with as little as Rs. 1,000 depending on the value of the shares of the company you wish to buy stocks of.
Long-term or Short-Term Investments
You can decide how long a period you wish to invest your money for. Many people invest for very short terms, buying at low prices and selling these shares as soon as they increase in value. There are also people who hold on to their shares for many years, earning returns on investment through annual dividends issued by the company.
Easy to Sell
As easy as it is to buy shares, it is just as easy to sell - which means you can pull out your investment at short notice whenever you need your money back (at the current value of your initial investment).
Drawbacks of Investing Your Money in the Stock Market
Anyone who has been involved in the stock market knows just how addictive trading can be. After you start making some real profits, you will be tempted to invest more and more money seeking to earn even bigger pay-offs. Often compared to gambling (which it is not), stock market trading has led to many people’s bankruptcy and heavy debts which often require debt settlement loans courtesy of service providers like OnCredit.lk.
Even a seasoned trader takes a risk every time they invest their money in the stock market. The share price of a company depends not only on economic conditions but also people’s psychology. Due to almost unlimited factors affecting share performance, there is always a risk of losing your money.
Requires Time and Effort
You can’t simply invest your money and expect to sit back and watch your money grow. You need to always be watchful of the current share price, as well as factors in the external environment that might potentially affect the company’s performance and share price.
Should I invest in the stock market?
The short answer is - yes.
If you have a bit of disposable income and you were contemplating your first investment, the stock market is a good enough place to start. Be prepared to lose your investment, and start small - invest a small amount of money and expect to earn minimal profits. As you keep on doing this, you will learn how to identify key performance indicators and avoid heavy losses. Remember to diversify your investments and not put all your money into one investment to reduce the risk.
For information about where to invest your money or savings, read here.