Whenever we talk about the Stock market and Trading, immediately images come to our mind and mostly those images are negative. Images of gambling crop up, we began thinking of those who gambled away their money in the share markets. You probably have a friend who gone ...
Whenever we talk about the Stock market and Trading, immediately images come to our mind and mostly those images are negative. Images of gambling crop up, we began thinking of those who gambled away their money in the share markets. You probably have a friend who gone through that, it’s a fool game they say but then again we hear about investors making millions and sometimes even billion of dollars, how is that even possible and how can they be so much disparity in the spectrum. On one side you have investors thinking why the market fell, losing the small fortune and cursing the markets. And on the other side you have investors making millions like Warren Buffet, Ed Seykota, Paul Tudor Jones and the list goes on and on. The question comes down to this, what you can do to make sure that you win the market that they have. That’s where Trade Academy comes in and what you can do with your money, you can find out here.
Now without a doubt India is growing and growing fast. It’s one of the fastest growing countries in the world but here’s something weird. In the US, you have over 40 percent of the population investing in the stocks but in India it’s less than 2 percent.
40 percent and 2 percent, isn’t that just a bit weird? You need to think of this course like a journey. You are going to start with nothing and you have to assume nothing. We are going to build those foundations brick by brick. So instead of learning how to buy or sell a stock on a computer straightway, we are going to learn what stock actually is and then we are going to move on to more advanced concepts. But the first thing is first, this lesson is about misconceptions. We are going to learn all those things that make things fuzzy and confusing and we are going to shatter those misconceptions.
So let’s start with the stock market returns.
WHAT IS THE SENSEX
You probably heard of the Sensex and Nifty or you probably heard your mom or dad talking about the Sensex go up or down or Nifty go up or down ,so what are they .You probably heard them on newspaper you read or TV. The oldest stock exchange in Asia is Bombay Stock Exchange or BSE and there lies the home of the Sensex. Now what is the Sensex? Over 5000 stocks are listed on BSE, that means you and I can buy stocks on the BSE and they are 5000 of them. On any given day some stocks are going up and some are going down. How would you track so many stocks? So that’s the reason an index was created like the Sensex.
The Sensex is nothing but an average of 30 big companies. The biggest companies in India, they all are market leaders. Some of them are Tata Power, Maruti Suzuki, Cipla, State bank of India.
Maruti Suzuki, the cars you drive
Cipla, the medicines you buy
State bank of India, you have bank accounts in that.
So, the Sensex is basically an average of 30 biggest companies of India.
As of 5 Jan 2014, the Sensex value was at 27887. Well that’s really nice but what about the return.
Here, I have the chart for that
We can see right from 1994, all the way to 2000 and then to 2014, we can see the returns of the average of these 30 stocks i.e Sensex. So, if you have invested in 1994, that year got you a profit of 14.26% and than -20.46% and then all the returns are on the given chart.
Now, here is something really interesting that how much you would actually earn if you have invested in the market. We have some outstanding years like 2009 which have 80% and 2003 which have 72%. And we have really bad years like 2008 where we have -52%. So from 2001 for example to 2014, the average returns for all these years would be an average annual return of 21% which is unbelievable. That is the number you have to keep in your mind. But if we see this from practical perspective, people normally do not buy the Sensex. They mostly invest in individual stocks like Reliance, Tata Steel etc. Let’s go back to 2005 and imagine we are investing 10 lac rupees in the 10 biggest companies of the Sensex. Those companies were ITC, NTPC, RELIANCE, HDFC BANK, ONGC, ICICI BANK, HINDUSTAN UNILEVER, SBI Bank, HINDALCO and HDFC LIFE INSURANCE
So you have 10 lac rupees and 10 companies, which becomes 1 lac each. Now the question is, from 2005 to the end of 2014, how much do you think 10 lacs are now worth? Take a wide guess, how much do you think the value has appreciated? Well it’s actually 68 lac rupees. But here there is something more into the equation. If you add tax benefits, if you are holding a stock for more than 12 months, it is completely exempt from income tax if you have made a profit. So the profit which is grown to 68 lacs is exempt from income tax. It’s completely different from the fixed deposit where if you do make money from the fixed deposit; you will pay 30% income tax if you fall in that slab.
We have done a survey in Mumbai, where we have asked people that what they would do if they have 50 lacs in cash? People said they will invest in land and property as they can live in it and its safe too. Some of them said they will invest in gold as they can touch it and wear it too and some of them preferred to deposit in the bank and investing in equity. So let’s compare investment options and their returns one by one.
INVESTMENT IN PROPERTY
Basically, tracking returns on property is slightly difficult. So in that case, we took top 10 best cities in India and figured out the average return, it comes out to be 50 percent for the last 5 years. The investment of 50 lac rupees would grow to about 73 lac rupees after tax judgement .That is actually a very good return on investment.
INVESTMENT IN GOLD
Without a doubt we Indians love gold and we believe that it is a safe investment as we can touch and feel it and in fact we can wear it too as people said in the survey. The average return on gold during this time was actually 46% so it was not as good as the property. Your 50 lacs would have grown to71 lacs which is not that bad.
INVESTMENT IN FIXED DEPOSIT
Fixed deposits are considered as safe investment. You keep your money with the bank and you know exactly how much money you will earn after it matures. It’s very convenient too as you can do it online or on mobile phones. Now there is one serious disadvantage with fixed deposit that most people don’t know. If you are in tax bracket, you will be taxed. So if you are at the 30% slab, you need to subtract that. Now, the average rate for the last 5 years for fixed deposit was 7.5%. If you minus the 30%, your 50 lacs investment is just worth about 64.5 lacs which is much lower than gold and property.
INVESTMENT IN STOCKS
Finally we will talk about the Stocks. Instead of investing in individual stocks, we will talk about the Sensex which doubled from 2010 to 2014, going from 14000 to 28000. It’s almost a 100% increase. Investment of 50 lacs would be worth of 102 lacs during this time period. And there is a tax advantage too. If you hold a stock for more than 12 months, it’s completely exempt from income tax. So we learn 2 things from this that during this period, the best investment was stock and you have a huge tax advantage.
Despite of comparing against all asset classes and seeing good response on stocks, one question will keep bothering you at the back of your mind that what if stock market crashes. Because in 2008 the stocks did crash, Sensex crashed, Nifty fell. It was global melt down, it was subprime crises. It happened in 2000 as well. What if you caught up in that mess? What if you invested 2 months before the market crashes? No doubt you will learn lot of methodologies in Trade Academy to avoid such things but let’s suppose if it happens, what will you do?
This is the chart of BSE SENSEX
If you see in the chart, there are datelines given at the foot and the mountain moving up is Price. So you can see the Sensex has gone from 4k in 2003 to 20k in 2007. This is over a long period of time. So let’s suppose you have invested somewhere in Oct 2007 and the amount invested is 55 lacs. Usually at these points, markets goes up really quickly and exactly if you see your investment was at 69 lacs. And then if we see the next year in the below chart.
The whole market crashes. Right from the peak you went from 20k to lower 10k. So, this is the point where most investors would exit. Here your original 55 lacs are worth just under 33 lacs. Now let’s suppose you held on your investments for long period, and you can see all the years after that crash in the chart below.
And now you can see, the market is far much higher from that crash and your investment which was under 33 lacs is now worth 90 lac rupees.
The interesting thing is that, it was a worst case scenario and the methods you are going to learn in the Trade Academy is going to make you better investor and trader, so you do not have to see such things. But remember, even in the worst case scenario you will come up as a winner.
Now that was BSE Sensex Index which moves from one end to other. It was reflecting a very natural movement in the economy that was happening at that time. Now, markets just like the economy go through boom and bust phases. So you will have time when economy is contracting where you will see depression and you also see euphoric time when stock market keeps going up.
This is natural cycle that happens in all the economies all over the world. What all you need to know is two techniques or you can say two methodologies.
It basically looks at the market in the form of financial. So you look at companies and their valuation.
It believes in Price action. So you look at the area of demands and the areas of supply.
Using both of these techniques, you can see area of contraction leaving or area of euphoric times coming in.
We have seen index before, now let’s see chart of some of the individual stocks.
Here again you can see all of the years given on foot line and the mountain shows the price fluctuating. In 2008 and 2009, you can see the stock going down and in 2015 it is quite up.
Here also you can see the stock going extremely down in 2008 and 2009.In 2015 it’s again high.
BANK OF BARODA
One thing is always certain that those who are not making their self inform decisions will lose and those who make their decisions on proper methodology win. This is the chart of the typical market cycle. This is not same for all the time but it will give you an idea of psychology.
In this chart you can see stealth and awareness phase where you have smart money and institutional investors coming in. This is where professionals accumulate and buy stock. In this we have Mutual funds, Insurance cooperations, Domestic Institutional Investors and Foreign Institutional Investors.
As the market start to run up, more and more individuals join in. These are seasonal professionals basically. These all comes under mania and blow off phase.
Then there comes greed and enthusiasm phase. Now that is the part where people buy stocks because it’s in fashion, people trades because other people are trading as well.
When the crash happen you will notice, these individual traders who are making easy money curse their luck, file for divorce and do all of insane things that are not normally done but professionals calmly wait and start to accumulate and the cycle repeat itself.
As we have seen in this lesson that investing in stock market is pretty good option.
There are some of the famous market investors who have been investing successfully for decades like
1-Warren Buffet the famous investor of all the time.
3-Paul Tuder Jones who is famous for using the mixture of fundamental and technical analysis.
All these investors are billionaires and they have been investing in long term trends.