Why Invest in the Stock Market? 5 Reasons to Consider
Capital Appreciation
One of the main reasons to invest in the stock market is to earn returns by selling your shares at a higher price than you bought them. This is possible when the company’s earnings, growth, or reputation improve over time, or when the overall market conditions are favorable. For example, if you bought 100 shares of Company A at Rs. 100 per share and sold them at Rs. 150 per share after a year, you would have made a profit of Rs. 5,000 (minus brokerage and taxes).
The stock market can offer higher returns than other investment options, such as fixed deposits, bonds, or gold, in the long run. According to a report by Motilal Oswal Financial Services Ltd., the Nifty 50 index, which represents 50 of the largest and most liquid companies in India, delivered an annualized return of 11.2% from 1995 to 2020, compared to 8.4% for gold and 7.7% for fixed deposits.
However, investing in the stock market also involves higher risk than other investment options, as the prices of shares can fluctuate unpredictably and rapidly due to various factors. Therefore, investors should have a long-term horizon and be prepared to withstand short-term volatility.
Dividend Income
Another reason to invest in the stock market is to receive a share of the company’s profits as dividends, which are usually paid quarterly or annually. Dividends provide a steady source of income for investors, especially in times of market volatility or downturns. For example, if you own 100 shares of Company B, which pays a dividend of Rs. 5 per share annually, you would receive Rs. 500 as dividend income every year (minus taxes).
Dividends also indicate the financial health and stability of a company, as only profitable and well-managed companies can afford to pay dividends regularly. Dividends also reflect the confidence and commitment of the management to reward the shareholders. Therefore, investors should look for companies that have a consistent and growing dividend history.
However, investing in the stock market for dividends also has some drawbacks, such as lower capital appreciation potential, dividend taxation, and dividend cut risk. Therefore, investors should balance their portfolio between dividend-paying and growth-oriented stocks.
Diversification
A third reason to invest in the stock market is to reduce your risk by investing in a variety of companies, sectors, and markets. This way, you can balance your portfolio and avoid losing all your money if one company or market performs poorly. For example, if you invest in both IT and FMCG stocks, you can benefit from the growth of both sectors and hedge against the cyclical or seasonal fluctuations of each sector.
Diversification also allows you to take advantage of different opportunities and trends in the market, such as emerging technologies, consumer preferences, or global events. For example, if you invest in both domestic and international stocks, you can benefit from the growth of both markets and hedge against the currency or geopolitical risks of each market.
However, diversification also has some limitations, such as higher costs, lower returns, and complexity. Therefore, investors should diversify their portfolio according to their goals and risk tolerance and not over-diversify or under-diversify.
Ownership Rights
A fourth reason to invest in the stock market is to have a say in the company’s decisions by voting on important matters, such as board appointments, mergers and acquisitions, and dividend policies. Investors can also benefit from the company’s growth and expansion by participating in bonus issues, rights issues, or stock splits. For example, if you own 100 shares of Company C, which issues a bonus share for every share held, you would receive 100 additional shares for free and increase your stake in the company.
Ownership rights also give investors a sense of pride and satisfaction in being part of a successful business and contributing to its social and environmental impact. For example, if you invest in a company that produces renewable energy or supports a social cause, you can feel good about your investment and its positive outcomes.
However, ownership rights also come with some responsibilities and risks, such as monitoring the company’s performance and governance, attending shareholder meetings, and facing legal or regulatory actions. Therefore, investors should exercise their rights wisely and responsibly.
Tax Advantages
A fifth reason to invest in the stock market is to enjoy some tax benefits, such as lower capital gains tax, dividend distribution tax, and securities transaction tax. For example, if you sell your shares after holding them for more than a year, you would have to pay a long-term capital gains tax of 10% on the gains exceeding Rs. 1 lakh, which is lower than the short-term capital gains tax of 15% on the gains from selling shares within a year. Similarly, if you receive dividends from domestic companies, you would not have to pay any dividend distribution tax or income tax on them, as the companies have already paid the tax on their profits.
Tax advantages also encourage investors to save and invest more in the stock market, which in turn boosts the economic growth and development of the country. For example, if you invest in an equity-linked savings scheme (ELSS), which is a type of mutual fund that invests at least 80% of its assets in equity and equity-related instruments, you can claim a deduction of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act.
However, tax advantages also have some
caveats and conditions, such as holding period, income slab, and indexation benefit. Therefore, investors should consult a tax advisor or a financial planner before investing in the stock market for tax purposes.
Conclusion
Investing in the stock market can be a rewarding and fulfilling experience for investors who want to grow their wealth and achieve their financial goals. However, it also requires some knowledge, skills, and discipline to navigate its complexities and risks. By following some basic principles and best practices, investors can start their journey in the stock market with confidence and success.
