It’s pretty hard to avoid hearing about the stock market in one way or another. News about the stock market shows up on practically every news report you hear on the radio or on television. However, just because the newspaper and the financial media talk nonstop about stock investing don’t mean that you would also blindly jump into the market.
Let us understand the actual purpose of investment first.
We want to invest in order to create wealth.
Wealth creation can be done for various purposes like retirement in fact early retirement, children’s education, buying a dream house, daughter’s grand marriage ceremony, to venture out own business, etc.
You can also pass on the created wealth to your next generation so that your children or grand children can enjoy the life to its fullest and your soul can truly rest in peace seeing how your smart investments have helped your family to have a dream life.
Whether you are starting from the scratch or have already invested good amount in the market, learning the basics will certainly add more value to your financial well being.
Wealth creation depends on the three major factors:
- Investment amount.
- Power of Compounding
- Rate of return
Start investing firstly with 10% of your salary in the first year, 12% of your salary in the 2nd year, and 15% in the 3rd year. This way increasing your investment share each or alternate coming year will create a good investment stock in your kitty.
In case you are not able to understand how to increase investment in future, try to invest maximum of the bonus or salary increments.
Power of compounding is one amazing instrument to create an unbelievable source of money in future. It certainly takes longer however never fails. To feel and understand the magic Compounding Power read this beautiful piece of article of ours (Link of Power of compounding page).
Rate of return is the most important player here because we need to choose the investment which generates return more than the inflation rate. To understand this concept better first lets read the chart mentioned below:
Out of all the common mode of investments mentioned in the table above, the highest return has been given by the stock market investments.
Here the point of focus is not highest return in fact the main point to discuss is that stock market returns have the proven track record to beat the inflation in the long run.
What stock market return is doing are the main criteria to create wealth.
If your investment is not beating inflation it is just working as an emergency fund for you. We need emergency fund too and that should also be certainly planned properly.
In fact the first step is to accumulate an emergency fund and then after use your savings to put into Stock market so that the returns generated through the market helps you to fulfil your dream goal of life.
Author: Abishek Raaman