Stock market is a Casino, only the very few lucky ones make money, says an investor when he was asked why he doesn’t invest in equity. Another says stock markets are only for gamblers, prices go up and down every day how can I buy something whose value changes every minute? How will this create wealth for me? Another says it is only the informed few who know where to make the money and when, as in only those who have access to insider information can buy and sell and make good money.
The reality is however far away from all the above mentioned arguments of not investing in Equity. It is not big amounts saved which will create wealth for the investor. Small amounts invested regularly and carefully in good companies can result in a large amount of wealth being created.
Let’s see a few examples of wealth creation by having invested small amounts and holding on to Investments over long periods of time.
If an investor, would have invested Rs 1 lakh in the TCS (IPO) at a price of Rs 850, his valuations would be approx. Rs 13Lakhs after two bonus issues were declared by the company one in July 2006 and other in June 2009. This is in addition to the tax free dividends received yearly.
If an investor had the invested Rs. 1, 00,000 in ITC in 1988, including dividends it would be worth Rs 25 crore!
The story of making big money by investing in Infosys
Let’s take another example this time of Infosys, In 1993 Infosys came out with its maiden public issue. If an investor had bought 100 shares of Infosys in its IPO it would have cost him Rs. 9,500/- and if he had done nothing just stayed invested this is what would have happened.
|Year||Face Value||Action||Ratio||Shares in hand|
|1994||10||Bonus||1 : 1||200|
|1997||10||Bonus||1 : 1||400|
|1999||10||Bonus||1 : 1||800|
|2000||5||Split||2 : 1||1,600|
|2004||5||Bonus||3 : 1||6,400|
|2006||5||Bonus||1 : 1||12,800|
|2014||5||Bonus||1 : 1||25,600|
So an investor having 100 shares now has 25,600 shares in 2014. With current market price of about Rs. 2,000 per share, the market value of the original investment is a whopping Rs. 5, 12,00,000 or Rs 5.12 crores.This is a fantastic rate of return without considering any dividends.
Let’s take the case of the big daddy of all investments multiplier-WIPRO.
Wipro’s IPO was in 1980. To get 100 shares of face value 100 each an investor would need Rs. 10,000. Let’s assume he was allotted 100 shares. If he has done nothing in the last 34 years, the Wipro stock has had multiple bonus and stock splits resulting in the person now having 96 lakh shares!
|Wipro Growth table|
|Year||Action||Number of Shares|
|1986||Stock split to FV Rs.10||4,000|
|1999||Stock split to FV Rs.2||9,60,000|
Wipro declared a 400% dividend for year ended 31-March-2014. Face value of Wipro is Rs.2/-, 400% of Rs.2/- is Rs.8/-. Hence the total dividend received is Rs.7.68, Crores tax free!
Has anybody really done this? Can I go buy Wipro now?
As the saying goes “hindsight is 20/20″, we can calculate all this only after the company has grown from selling vegetable oils, soaps to becoming an IT major. Had everyone known that this cooking oil company would give such returns in 1980, everyone would have invested in this and become billionaires. Also the shares wouldn’t have been listed on any exchange in 1980 and you would have had to invest privately into the company. Buying Wipro now wouldn’t give you the same returns as the company is already grown to such proportions and such a large cap stock giving multi-fold returns is very hard.
How can I get returns like this?
There have been numerous such companies that have given great returns to investors, like Reliance, Titan, Dr. Reddy Labs, etc. No one can predict which company would grow to such a huge levels before 30 years. Remember, for every Wipro like story, there are thousands of companies which has eroded investors wealth and become penny stocks. Investing in equities alone isn’t enough, investing in the right company at the right time is even more important.
Even if someone invested in the best company in the world, its basic human psychology to book profits when the stock prices increase so many fold. Some investors don’t feel comfortable even for a 50% increase in their investment. No one would have the patience to hold such a stock when he sees how volatile the market is in short-term.
If you really want such phenomenal returns, you would have to do lot of fundamental research, do your due diligence on the company and invest in it when it’s in the early stages. Most important of all is, staying invested in the company for the really long-term to reap the entire benefits.
Tips for Small Investors:
There are many such companies which have given super normal returns to investors, the key lies in identifying a company and holding on to your investments and letting them compound over a period of years.
A simple way to invest small amounts regularly is to start a stock SIP, buy 1 share of 3-4 good companies every month regularly, the minimum tradable quantity of any listed share in India is 1 so an investor can buy 1 share each of say Infosys, Wipro TCS, ITC or any company he likes or believes will do well in the future. It is these small amounts invested regularly which will result in huge appreciation over a period of time.
Disclaimer: For every example mentioned above there are many hundreds of companies which has destroyed investor wealth, have disappeared and are now not even traded. For every Wipro or Infosys, there must be hundreds if not thousands of fly by night companies who have made investors run away from the equity market since their initial experience has been bad. As always please consult an investment advisor or financial planner before taking any investment decision.
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