Towards Financial Independence: Investing in equity shares
Hello everyone!
A few days ago I wrote an introductory post about my journey towards trying to achieve financial independence at an early age. To be perfectly honest, I haven’t zeroed in on an exact age yet and I probably never will. As passionate I am about this I have no intention to make it a torturous experience to get to a certain bank balance. There will undoubtedly be sacrifices to be made along the way, but I don’t believe they need to incredibly rigid.
Anyway that’s a whole other story. Today let’s talk about investing in the stock market.
What exactly is a share? A share can be defined as a unit of ownership which represents an equal proportion of a company’s capital. In simpler terms, a company’s equity (the funds it has raised through its owners) is divided into equal units, each called a share. When you buy a share you technically become one of the owners of that company.
Unfortunately buying one, or even a few hundred shares of any company isn’t exactly going to get you in on the Board of Directors meeting. This is because major companies have an astonishing number of shares in the market. For reference, as I write this article you can buy one share of Apple for $344. However Apple’s market capitalization (total number of shares x current share value) is currently a fairly ridiculous 1.49 trillion.
Yup, that’s a lot of zeros.
If you divide its market capitalization by the current share price, you’ll realize that it has about 4.3 billion shares in circulation.
So does that mean owning just a few shares is of no real use? Absolutely not! What’s important to remember is that your personal financial gains from the share market purely depend on the percentage gains you make on your holdings. Since each share has an equal value, the benefits of a rise in share price benefits each shareholder proportionately. It’s important to note that I used the word proportionately and not equally. A person holding 1,000 shares will obviously make a greater gross profit (total amount) than someone holding 10 shares, but they are each awarded the same benefit per share.
If you’re someone with a background in trading in the stock market or someone who works in a related field, everything I’ve said above may seem painfully obvious. But as someone with an academic and professional background in finance, I know many people for whom finance and markets are incredibly mystifying, so I thought it worth the effort to break it down for their benefit.
So coming to the title on my article, why should you start investing now if you’ve never done it before? To put it simply and not so subtlety, because the world is pretty damn screwed right now. No matter where you live, every major global economy has been hit hard by the pandemic. The worst and most painful impact of that is the tens of thousands of people across the globe who’ve been laid off from their jobs. Indeed if anyone reading this falls in that category, you have my deepest sympathies and I pray that you stay strong and come out of this crisis soon.
But the other impact that we’ve all seen is the value of the stock markets and shares come crashing down. Admittedly in most cases, this was at its worst around March and the markets have recovered to a certain degree, but by and large they are still well below their usual standards.
To try to take advantage of this downturn, I began investing in equity shares myself for the first time close to two months ago. And I have to say I’m pretty happy with the results so far. In the spirit of complete transparency, here are my actual numbers (rounded off for convenience)
I’ve invested 125,000 INR (1 USD = 75 INR) so far in 17 different companies over 2 months. As of today, my portfolio value is 146,000, therefore having an unrealized gain of 21,000. The reason I used the word unrealized is because I haven’t sold any of my shares and so haven’t realized that profit in terms of money in my account yet. This is keeping with my personal investment strategy of investing in companies with strong fundamentals for a long term period and not trying to beat the market to achieve short term gains.
The reason I’m encouraging everyone to start investing in shares now is because markets are at an all-time low, any investment made in blue chip (well-established and financially sound) companies is likely to give you positive returns as economies return to normal. It may not be the most dramatic profit but it’ll be a start and give you real hands on experience which is vital.
Despite what I’ve just said, for people venturing into the stock market for the first time, I’d strongly recommend you learn to walk before you run. Do not get too enthusiastic if you start seeing positive trends and dump huge amounts of money into the market. We’re still living in very volatile times and liquidity (cash in hand) is important. I personally have invested a fairly large amount given my income, but this is a fairly balanced decision since I currently live with my parents (so I have no costs), all of us have our jobs without any pay cuts, and I’m investing for a longer term. If your personal situation does not allow this flexibility, please start small and build your way up.
A few things I personally looked for when choosing companies to invest in, and a few tips,
- Identify companies with a strong financial position and historical performance. Avoid risky bets (high risk-high return) type options.
- Every one of us has a friend or relative who invests in the market. So take advantage and talk to them. Ask them what they look for and what their experience has taught them.
- Analyze trends: A simple Google search will give you all the historical data you ever need for any listed company. While most shares are low now, look at their historic prices to see if they were already on their way down before the pandemic; that might be a warning sign to stay away.
- Don’t panic: If you buy shares of a company and see a 5% drop, don’t panic and sell it right away. The market is volatile but strong companies will find their way back up. You must of course be vigilant and not let losses become too high but have faith in your decisions.
- Start small: I mentioned this before but I must again. Don’t invest large amounts all at once if you don’t have experience or you’re not in the most stable financial position.
It’s incredibly important for me to clarify that none of the points above are professional advice of any kind. My intention with this post, and indeed this series on financial independence, is to document the steps and decisions I’ve taken, and share the results I have. I’m never going to claim my steps are perfect or that the results are guaranteed. I’m just trying to do my bit to spread tiny bits of awareness, knowledge, and experience.
Edit
Just adding a few videos from channels I follow which give a simple insight into investing for beginners. I’m not affiliated with these channels in any way, they’re just ones I watch myself,
“How I Pick My Stocks (Investing For Beginners)” — Nate O’Brien
“Stock Market For Beginners 2020 | How To Invest (Step by Step)” — Nate O’Brien
“How To Become A Millionaire: Index Fund Investing For Beginners” — Graham Stephan
You could also check out the website of ‘Mr. Money Mustache’ for a lot of information on financial independence, although there’s a lot of information on his website so it requires some patience to navigate through it.
Thank you so much for reading my post! If you found this useful or have any other perspectives to add, do let me know in the responses section. Additionally you can have a look at my first post in this series on my profile too.
Until next time! :)