If inconvenience and lack of knowledge were deterrents for you, let me tell you that with the advent of digital platforms the onboarding process has become extremely fast and hassle-free. You can complete your KYC and identity authentication within minutes, from the comfort of your homes as opposed to age-old methods of standing in lines with physical copies of share certificates.
Power of compounding
When it comes to investing and understanding how wealth multiplies, the concept of compounding has a huge role to play.
Here’s an example to understand the power of compounding:
Investment made in a stock: Tk 100
Interest earned: 10%
Money at the end of year 1: Tk 110
Here you have invested Tk 100 in year 1 and at the rate of 10%, your return on investment is Tk 10 and the final amount is Rs 110.
Scenario 1: You redeem a part of your investment, say Rs 10
Your investment at the end of year 1 was Tk 110. Say you redeem Tk 10. Then the amount you will be investing in year 2 is Tk 100.
Amount invested: Tk 100
Interest from stock: 10%
Money at the end of year 1: 10% of 100= Tk 110
Scenario 2: You do not touch your investment and let the power of compounding do its job
In this case, your interest from last year gets carried forward. Hence the amount invested at the beginning of year 2 is Tk 110.
Amount invested at the beginning of year 2: Tk 110
Interest from stock: 10%
Money at the end of year 2= (10% of 110 )+110 =Tk 121
Hence, if you let the power of compounding work on your investments, your money will grow at a rapid pace. Do not disturb your stock investments during its tenure. Let it stay invested for a long time to get the true value of the stock’s growth story.
Win The Race Against Inflation
Inflation is a definite hurdle when it comes to wealth creation and hence, choosing avenues that beat inflation is the only way to grow rich in the long run. Say an investment gets you 3-4% returns every year but the inflation rate itself is 3.5% or so.
Your Tk 100 investment can get you Tk 104 after returns but due to 3.5% inflation, the value of money reduces and what you can actually afford is just Rs 100.5 approximately.
The inflation rate can even be higher. The returns you earn from your investment will either cancel out or be minimal. Your returns might be Tk 104 in year 2 but because things have gotten expensive due to inflation, what you can actually afford is probably just Rs 100 worth goods.
If your returns are not higher than the inflation rate, effectively your returns from investment become minimal, zero or maybe negative and stock investments can fetch you high returns over a long period.
Fixed Returns are Boring
If you are wondering why to invest in stock markets at all, the answer is that fixed returns can get boring as there are other places where you can get a better value for your money. Traditional products like fixed deposits or recurring deposits are safe instruments but also give fixed returns for the investment tenure. While stocks are aligned with the markets and can give you double-digit returns in its good days as well, traditional products will give you a set fixed number on all days. So dividing a portion of your assets into accelerated wealth-creating instruments like stocks can help you reach your goals faster with the same investment amount.