Entering the world of investing in stocks? Dreaming about the awaiting potential for growth and financial freedom? Does stock market seem to be your best destination to park money?
In this blog-cum-guide, we will explain you the power of holding stocks and why it’s a smart move, rather than just having quick gains? By the end of this, you’ll understand the benefits of holding shares and how they can help you achieve your financial goals and provide you with growth.
Wealth Creation and Growth
When we talk about holding stocks, what most people fail to realise is they’re owning a piece of a company. Just like ownership of firm, business, shop, or organisation, you’re also an owner. Majority of the retail investors fail to develop this mindset while holding stocks. So, when it comes to investing in a business, would you ever prioritise someone else recommendations over your own research?
You would never! Still the Indian majority invests from tips and recommendations without any research and continue holding stocks, even if they know about the quality of these stocks.
If this ownership is in good stocks, it can lead to significant long-term wealth creation. With India running at one of the highest development speeds, its stock market has been a powerhouse of growth. Many companies have achieved remarkable success. Holding stocks of such good companies means you share in their success.
Imagine you invested in a company, a few years ago. Over time, as the company’s profits grow, so does the value of your shares in your investment portfolio. This phenomenon is known as capital appreciation of your portfolio. It’s not uncommon for wise and emotionally balanced investors to witness their investments multiplying several times over in the long term.
Let’s consider an example: if you had bought shares of a good Indian company, like TCS, Infosys or MRF, a decade ago, you would have seen substantial growth in the value of your investment.
Another reason for holding stocks is the opportunity to receive income from dividends issued by the company. When companies make profits, they usually distribute a portion of those profits to their shareholders in the form of dividends. This is like you getting a direct share of the company’s earnings.
Dividend yield is a key financial metric that indicates how much you can earn in dividends relative to your investment. In India, dividend income is even more attractive due to the favourable tax treatment it receives. Moreover, Indian investors are crazy over dividend income. Sometimes they just buy the stocks before the ex-dividend date just to get the dividends credited. Dividend income in India is currently taxed at a lower rate than other forms of income.
Also, a few companies have their DVR shares in market. These DVR shares empower its owners to acquire increased dividend earnings by sacrificing their voting rights.
As mentioned earlier above in this blog, one of the primary advantages of holding shares is the potential for capital appreciation of portfolio. Indian stock market has a history of delivering massive returns over the long term. Financially sound companies listed on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) have seen their share prices rise over time. The power of compounding comes into picture here as the longer you hold your shares, reinvest your received dividends, the more they have the potential to grow.
Diversification is a key strategy for reducing risk, while making investments. When you diversify your investments, you distribute your money in stocks across different sectors as well as assets. Holding stocks is an excellent way to diversify because it allows you to invest in various companies across different industries. Another interesting diversification strategy is investment in Index Funds or ETFs. This helps you to invest into all the companies constituting Nifty50 under one roof of investment. This reduces your risk because even if one industry faces a downturn, your other investments may still perform well.
Imagine yourself as an investor who holds shares in a mix of companies from sectors like information technology, healthcare, and energy. If one sector faces challenges, your overall portfolio is less likely to be severely affected. Isn’t that awesome?
Ownership and Voting Rights
When you buy shares of a certain company, you become a part-owner of that company. This means you have a say in how the company is run, despite how small that might be (depends upon your shareholding). Your voting rights allow you to participate in shareholder meetings where important decisions are made.
Liquidity and Market Access
Holding stocks of good quality offers high liquidity. This means you can buy or sell your shares quickly and easily. You can transact in shares this through stockbrokers and online trading platforms. The presence of stock exchanges like NSE and BSE ensures that the market is highly liquid and has a robust platform for protecting investors interest.
Liquidity is of utmost importance because it allows you to sell your holdings and access your funds when needed. This is quite the opposite from some investments, like real estate, which may not be easy to sell quickly.
When you’re investing and holding stocks in Indian markets, long-term capital gains from holding stocks are favoured with tax benefits. If you hold your shares for more than one year, you can benefit from a reduced tax rate. Additionally, the Securities Transaction Tax (STT) is relatively low than other assets, making stock investing more tax-efficient compared to other forms of investment.
To make the most of these tax benefits, it’s essential to understand the tax regulations as per your income slab and plan your investments accordingly. You can also consult your CA or refer to good YouTube resources like Labour Law Advisor to plan your taxes and investment properly.
Rupee Cost Averaging
For those who prefer a systematic and periodic approach to investing, holding stocks can involve a strategy known as Systematic Investment Plan (SIP). This SIP method of holding stocks helps you reduce market volatility in your portfolio by investing a fixed amount of money at regular intervals. These intervals could be even weekly, monthly, or as per a custom criterion. As share prices fluctuate, you end up buying more shares when prices are low and fewer shares when prices are high. This is a form of rupee cost averaging that can work in your favour over the long run, if you invest in good stocks selected with the help of a good stock market paid course.
Risks and Risk Management
It’s extremely important to understand that holding stocks doesn’t come without risks. Stock market can be volatile at times and these stock prices can fluctuate. However, with proper risk management, you can minimize the impact of these fluctuations.
One strategy is to use stop-loss orders that automatically sell your shares if they reach a certain predetermined price. This can protect your investments from significant losses if your investment horizon is on a shorter timeframe. In the long term, say for 10 years or more, these stock fluctuations don’t matter at all.
Additionally, a well-diversified portfolio can help spread the risk. When one stock underperforms, others may compensate, reducing the overall impact on your portfolio.
The Indian stock market operates under the vigilant eye of the Securities and Exchange Board of India (SEBI). This regulatory body is responsible for regulating the securities market and protecting the interests of investors. It’s necessary for Indian investors to stick to the regulations and advisory set by SEBI to ensure a safe and fair market environment.
You must stay updated on regulatory changes and guidelines, sent over your email given in your demat account, as they can impact your investments. You should always choose a reputable stockbroker and do thorough research before investing even a single rupee into any stock.
Let’s look at some real-world examples of the benefits of holding shares.
- Case Study 1: Ramesh invested in shares of a MRF company 2 decades ago. Over time, the company’s stock price increased, and Ramesh received substantial dividend income. The power of compounding allowed his wealth to grow significantly.
- Case Study 2: Priya diversified her long-term portfolio across different sectors by holding shares in IT, healthcare, and consumer goods companies. In the crash of 2019, when several sectors faced challenges, her overall portfolio didn’t go down much because of Pharma and IT, showcasing the value of diversification.
How could you start?
So, you think that you are ready to start holding stocks? Here are some practical steps for you before you start investing:
- Educate Yourself: Before you invest a single rupee, start by learning the basics of the stock market. You could consider attending a stock market free webinar or even enrolling in one of the top 5 online stock market courses in India.
- Choose a Reliable Broker: You must select a reputable stockbroker, preferably full-time service brokers and find the best stock market courses in Delhi for in-depth knowledge on investing and trading strategies and stock selection to execute.
- Diversify: It should be very well understood by now that you must spread your investments across different companies and sectors to reduce risk. If you’re holding stocks, diversify it across sectors, if not assets.
- Stay Informed: You must keep an eye on market news and regulatory changes and stay alert with the guidelines.
- Invest for the Long Term: You must remember that the real benefits of holding stocks often come when you hold them for an extended period, and not just in the short term or overnight.
In conclusion, holding stocks is a powerful wealth-building tool for investors whether big or small. The potential it carries for capital growth, dividend income, and the ability to influence companies make it an attractive investment option. However, it’s crucial to understand at these benefits could only be achieved if you invest in good quality stocks.
As you progress in your stock market journey, you must remember that knowledge is your most valuable asset. You must keep on learning, continuously educate yourself, stay informed, and make informed investment decisions. By doing so, you can unlock the full potential of holding stocks and achieve your financial dreams over the long term.