Stock Market Investing: Worth It?

Fund-Matters | August 7, 2019 | Investing, Investments, Personal Finance, Stock Market Investing, Stocks, | 0 Comments

​​​Shares are designed to provide investors with two types of returns – dividend income and long-term capital appreciation. The dividend yield (annual dividend income as a per cent of share price) varies from company to company.

For large blue chip shares, the dividend yield can vary from 1% to 6%. Long-term capital appreciation is the annualized  per cent of appreciation in share price from your purchase price. This differs vastly from company to company and depends on your entry price and growth prospects of the company (if the company does not perform well, there can even be negative capital appreciation). The total return on your stock will be the dividend income plus long-term capital appreciation.

Sensex returns:​​

The benchmark index of Indian stock markets, Sensex (the 30-share Bombay Stock Exchange sensitive index) was launched in 1979 with a base value of 100 points at its inception. During the last 40 years, the Sensex has climbed from 100 points to 40,000 points. The Sensex has risen at a CAGR of about 16% since its inception. Hence, Sensex has given far higher returns in the long run than the returns earned on fixed income investments. 

High returns on blue chip shares:

Some of blue chip individual shares have given even higher returns than Sensex (a basket of 30 shares). For example, since its listing in 1993, Infosys has given a compounded annual return of 36%.  HDFC Bank has given a compounded return of over 30% per annum since its listing in 1995.  Another blue chip, HUL share return is a classic case of testing the patience of investors. From 1997 to 2010, HUL’s stock price went nowhere! It was in a 13 year coma. But from 2010 onward, its stock price has sky-rocketed from Rs 200 level to current Rs 1800 odd level.

Short term pains and long term gains:

To gain from stock market, one needs to be a disciplined investor – invest only in blue chips or potential blue chip shares and hold for long term. There can be short term fluctuations or even wild swings some times and stock market tests your nerves. During such nerve wracking movements, the investor needs to have conviction in the shares that he has invested in and should not liquidate his holdings in blue chip shares in a panic.

Markets do return to their winning path, once the concerns subside. For example, the Sensex fell from 21,000 points to around 7,500 points between January and October 2008, after the Lehman crisis broke out. A fall of nearly 13,000 points in 10 months. However, it regained all the lost points and crossed 25,000 in 2014, after global economies regained their growth through various stimulus measures.

Liquidity:

Every day, investors are buying and selling the shares on the stock exchanges. This makes stocks a very liquid investment. When you want to cash out, you can sell your shares at the prevailing prices and the funds are credited to your bank account on the second day. Other assets are much more difficult to sell. If you have invested in a property, it could take months to find a buyer and get the money. Fixed Income financial investments are generally locked in for a specified period.

If an investor has the required acumen, patience and nerves, stock markets do provide higher returns in the long run.

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