Restrictions
In some specific cases, it’s better for you to not get into the stock market. Here are a few reasons.
- The thought of losing money scares you
- You have debt that you need to clear out
- If you need money in hand for expenses
- If you do not have an emergency fund
- You need a fixed income stream, instead of potential capital gains.
If you don’t fall into any of these categories, or can get yourself out of these constraints, then investing in the stock market is for you!
Financial Freedom
Investing in the stock market gives you financial freedom. You don’t have to trade hours for money. Rather, you just need to spot good stocks and invest in them. This can build up a substantial amount of passive income.
Beating Inflation
If you invest in a fixed-income investment, you can protect your investment, but these investments usually give feeble returns, that are eaten up by inflation.
Think of inflation as the story of the Three Little Pigs. Your money is the three pigs, the wolf is inflation, and the houses are different types of investments.
The pigs in weak houses will be eaten up by the wolf. The pig in the brick house will thrive, as the wolf cannot get to him.
As an investor, you need to spot investment opportunities that will not only beat inflation but earn you money as well.
Increased Cost Of Living
Another reason you should invest in the stock market is the increasing cost of living.
10-15 years ago, groceries were much cheaper. Our parents tell us stories when even paisa had value. Nowadays, even the cheapest sweets and chocolates are more than 5-10 RS.
In the future, prices will further increase. If you had 1 rupee in 2000, it would not be worth 1 rupee in 2021. To keep our money at the same value, we need to be ahead of inflation.
Compound interest
Compound interest is a powerful tool. If you invest 1 lakh rupees at 10% simple interest a year, for 10 years, you would get 10,000 RS as interest every year.
At the end of 10 years, you would have gotten RS 1 lakh from interest. Combined with your principal amount, you would have 2 lakhs at the end of 10 years.
With compound interest, say you reinvest that 10,000 RS every year, instead of taking it out.
Then, after 10 years, you would have 2 Lakhs 59 thousand rupees. That’s almost 60,000 RS more!
The longer you wait, the more powerful compound interest is!
Here is a table illustrating this idea
Tables
| Simple Interest: Year | Amount at the end of year | Interest rate |
| Year 1 | 1,10,000 | 10% |
| Year 2 | 1,20,000 | 10% |
| Year 3 | 1,30,000 | 10% |
| Year 4 | 1,40,000 | 10% |
| Year 5 | 1,50,000 | 10% |
| Year 6 | 1,60,000 | 10% |
| Year 7 | 1,70,000 | 10% |
| Year 8 | 1,80,000 | 10% |
| Year 9 | 1,90,000 | 10% |
| Year 10 | 2,00,000 | 10% |
| Compound Interest: Year | Amount at the end of year | Interest Rate |
| Year 1 | 1,10,000 | 10% |
| Year 2 | 1,21,000 | 10% |
| Year 3 | 1,33,100 | 10% |
| Year 4 | 1,46,410 | 10% |
| Year 5 | 1,61,051 | 10% |
| Year 6 | 1,77,156 | 10% |
| Year 7 | 1,94,872 | 10% |
| Year 8 | 2,14,359 | 10% |
| Year 9 | 2,35,795 | 10% |
| Year 10 | 2,59,374 | 10% |
Long-term, stocks can give huge returns. Using the same idea of compound interest and investing in reliable stocks that can give more than 20% interest a year, your money will grow fast!
If you want to trade short term, you have the opportunity to earn even higher than 20-30%.
You can see why stocks are an excellent investment option.
There are other investment instruments that also give us compound interest, like bonds.
However, these have a fixed interest rate that is usually under 12%.
Many people say that stocks are risky investments. This is because they either have lost money in the market, or they know someone who did. Contrary to popular belief, the stock market is totally safe if you know what you are doing!
