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What Are the Top Benefits of Investing in the Stock Market?

Personal Finance

Stock markets are a complex environment that most people are scared to traverse. There is an innate fear of losing hard-earned money if invested in stocks. Fear of uncertainty keeps the average salaried middle class at bay. Our human psychology is to fear the unknown, which is in play when we think of investing in the stock market. This article aims to bust all such myths and elucidate how investments in the stock market can benefit you.

What is the Stock Market

Let us first understand the basics of how a stock market works. A stock is a unit of ownership in a publicly held company. These units are traded in an organized marketplace called the stock exchange. The first stock exchange, the London stock exchange, was founded in 1773, while in the US it started in 1793. In India, the first one was established in 1875 as the Bombay Stock Exchange, which is now worth Rs 266 trillion and houses approximately 6000 companies. To eliminate the monopoly, the National Stock Exchange was established in 1992 in Mumbai. The estimated market capitalization of the National Stock Exchange with 2002 listings is Rs. 199 trillion.

Investing in the stock market

Investing in the stock market has become much easier over the years, making it accessible to the general public. At the same time, the process has been made very secure and safe for consumers. The Securities and Exchange Board of India (SEBI) is the regulatory authority established under Section 3 of the SEBI Act 1992 to protect the interests of investors and promote the development of the stock market.

An investor cannot directly buy or sell shares on a stock exchange. Registered members of a stock exchange, called stockbrokers, trade on an investor’s behalf. If you want to invest in stocks, you have to approach a broker, who will then take you through the process.

Benefits of Investing in the Stock Market

There are several benefits to investing in the stock market. We are listing some of the top reasons for you to consider:

  1. Returns: Predominantly, the stock market has given generous returns over time. Among all other investment options available in the market, stocks have been the best option in terms of returns. If you focus on companies with a consistent growth rate and increased quarterly earnings or on growing industries that contribute to the country’s economic growth, that will help you steadily develop your wealth over time. Since the 1980s, the Indian stock market has always given lucrative returns to investors. Even in crises during the 2008 recession and the 2020 pandemic, stock markets have stood their ground and have continued to grow by leaps and bounds. 
  2. Diversification benefits: There are a variety of financial products that can be traded in the stock market, like equities, commodities, bonds, mutual funds, and derivatives. This gives investors a wide array of options to choose from when it comes to investing their money. Hence, investors can diversify their financial portfolios and mitigate the risks associated with investing. The benefit of diversification can be seen in the overall growth rate of your portfolio. As a diversified portfolio contains individual stocks from different sectors of the economy, the ultimate return is positive even if some sectors are not performing well. 
  3. Inflation hedging: We must consider the returns on our investments in relation to inflation. Stock markets have always beaten inflation by a considerable margin. Due to inflation, companies benefit from the rising prices, which boost share prices. It can be seen that growth stocks such as technology or FMCG outperform the overall market and provide a solid safeguard against inflation. 
  4. Liquidity: Stocks are highly liquid assets, which means you can convert them to cash at any time. For most investments, there is a lock-in period and a high penalty if you want to withdraw prematurely. Thus, stocks are favored in this case. 
  5. Capitalizing on the booming economy: The stock market reacts to all the economic growth parameters such as GDP, inflation, and corporate earnings. As the economy grows, investors see a handsome return on their investment. With the price increase, corporations make more money, which leads to higher profits that directly benefit stock investors. 
  6. Dividend income: A dividend is an amount distributed by the company from its profits. It is a way for companies to distribute a portion of their profits to shareholders, even if the stock has fallen in value. Periodic dividend payouts help retired investors pay for their lifestyle. 
  7. Transparency: With the presence of a regulatory body like SEBI, investment in the stock market has become very safe, secure, and transparent. SEBI considers it a priority to protect the interests of investors. Hence, investors are protected from fraudulent brokers and companies. 
  8. Ownership: As a shareholder, you will own a portion of the company in which you invest. This ownership in the company ensures that you can drive the management’s decisions. You will receive periodic updates about the company’s performance and are also invited to vote on important board decisions. This gives shareholders a sense of responsibility and companies a sense of accountability.

Through the years, investing in the stock market has become more popular. The salaried class is now more interested and confident in investing in the stock market to increase their wealth. Investing in the stock market also comes with a certain amount of risk and uncertainty. But if you can navigate carefully and make informed decisions with the help of your broker, you will be able to reap high benefits.

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