Note: This is Part 1 of the investing in the NEPSE for beginners series. It revolves around the general idea of investing in the stock market in Nepal or any other country. We will go through the inner workings of the share market.
If you think you know exactly how the system works and want to dive straight into the ways to start investing, Part 2 of the series is coming soon.
To invest in the stock market is to claim ownership of the company that is not yours.
In simple words, you are saying that you are ready to put your money in their business to get a portion of the profit they make.
However, you are also saying that you are ready to bear the loss in case the company you invest in stops to be in profit.
This is the number one reason why people are afraid to invest in the stock market. They simply cannot fathom the idea of their life’s earnings disappearing in air overnight.
However, the fact that there are risks is a reason to better understand how it works and be a better player in the stock market.
Avoiding the market altogether to avoid the incorporated risks does not make any sense whatsoever.
How did this giant idea of investing and stocks come into being? What is its history?
You obviously know that the continents of the world were not connected by any means in the past. Once people became explorers and traveled between continents, trade flourished on a massive scale.
Thus, those who were able to go to new places and sell their products made a great deal of money.
Also, those who brought valuable clothing, handicrafts, tools, and herbs from strange lands became rich.
However, there was one huge barrier. Since most of the transportation was done on water (oceans), the journey was a huge risk for explorers. They would either return with lots of money or not return at all.
Hence, the explorers and the people who funded these journeys realized that this level of risk was not bearable to any individual or a small group of people.
Thus, they wanted other people to invest their wealth into these expeditions. In return, they promised to pay them a fair share of the profit if the intercontinental trade was a success.
On the other hand, if the ship sank in the storm or if the crew found nothing of value, everyone would take their calculated share of the loss.
How’s the investing scenario like?
This was how it started. People who invested in such expeditions got filthy rich. And that too, without ever leaving their country, let alone their continent.
Whenever the next big thing hits humanity, like the railroads, steel industries, technology, or finance, for example, people who have realized their potential and invested early have always profited.
However, there are also a lot of dead corpses lying in the stock market. By dead corpses I mean people who entered the investing world at the wrong time and took the wrong decisions, only to lose everything they had.
Investing in the modern world
The exact principle is the cornerstone of investing in the stock market today.
While your imagination of the stock market revolves around numbers, charts, and graphs, it is much more than that.
Every number and every chart represents a company. Behind every company is a mastermind thinking about the ways to turn a profit and cut loss. And behind every strategy implemented is a story.
But since every story cannot be put into words or pictures, the only way to know about the performance of an institution is to look at how much money it makes.
The charts and the bar graphs are simply visual representations of the company’s financial performance.
They tell nothing about the team that is leading the company. Nor do the numbers tell anything about the sentiments of those who work there.
The only thing numbers can tell is whether their combined efforts turned profitable or not.
Hence, in the world of investing, skill is rewarded irrespective of your age, gender, race, or ethnicity. You either make money or you don’t.
How do people make money in the stock market?
Buying a stock is exactly like buying any other item of value.
For instance, let’s imagine you bought two pencils from the stationery this morning at Rs. 10 each.
When you reach school, you see that one of your friends forgot to bring his pencil. You would give him one of yours but you also want to be safe and have an extra pencil with you in case the other one breaks or something.
Now since the art teacher is very strict, your friend will entice you to sell the pencil at a higher price. He will request you to give him one of the two pencils at Rs. 15.
And being the money-minded guy you are who cares about a friend in trouble, you indeed sell him one at Rs. 15.
The extra Rs. 5 is for the service you did of buying and bringing a pencil for him.
This is exactly how profit is made in the stock market. Basically, you buy a stock at a lower price and sell it to someone else at a higher price.
Now, the buyer buys that stock from you because he also wants to sell it at an even higher price.
Yes, this is weird since stock prices can’t always go up. But this is all attributed to the interesting theory in investing called the Greater Fool Theory.
Greater Fool Theory: Even if the stock price is at its most possible high, there will always be a greater fool who thinks the stock will go up. Thus, if more fools like him buy the stock, the price will go up indeed.
What does it mean to buy a stock or share?
I told you already that investing is simply to claim ownership of a company.
If a company needs Rs. 100 to do business, it will need people to invest the sum.
Now, in reality, the capital needed is really large so a single person cannot fund it. This is why shares are allotted in the first place.
Let’s assume that the total needed money was divided into 5 parts. Now, each part is Rs. 20. Thus, if you go and contribute a part, you are paying Rs. 20 into the business.
This divided part is called a share. If you were rich enough and decided to invest Rs. 60, you are basically buying 3 shares out of the total 5.
Congratulations! You are the majority shareholder of the company. Your decisions and opinions will matter in the company more than anyone else’s.
Exercise 1: Let’s say a company needs Rs. 35,00,000. The total sum is divided into 17,500 shares. If you invest Rs. 1,20,000, how many shares did you buy?
The right answer is 600 shares. Also, can you determine what percent of the company you own?
Is investing in stocks just like gambling?
Investing is exactly like gambling if you do not learn the rules.
If you are thinking of investing the spare money you have to check if you can make a few extra bucks, you might want to reconsider.
There are more losers than winners in the stock market. The few that profit from investing are ones who have spent years learning the rules of the stock market. Thus, they take all the wealth from those who remain ignorant.
When I was first introduced to the idea of investing, I also thought that after I invested a few bucks in NEPSE, I would slowly learn all the basics and be a successful investor.
However, I recently watched a Youtube video of an investment advisor. What he said helped me get my stuff in place.
He said something along the lines of:
There are two kinds of people in the stock market: those who have the money and those who have the skills. And when the stock market goes through a movement, those who had the skills will have money, but those who had money will lose them and now learn the skills.
If you also take the second path, the learning is going to be costly for you.
Yes, you will never master the stock market without a few scars and bruises on your finances. But if you refuse to learn the skillset first, the scars and bruises are going to be painfully deep.
But isn’t my money safer in a bank account?
Banks provide pretty good interest rates in Nepal. So if I earn more and save as much money in the bank, my money will compound over time, right?
We only looked at one side of the picture. While banks provide interest rates to lure people in to save their money, something called inflation exists too.
Remember adults talking about how cheap things were in “their time”? They talk about how they could party among a group of 5 with just Rs. 20.
What happened today? Why can’t we buy stuff at the same price they were 10 or 20 years ago?
The answer is that our currency inflated. Simply, the value of the rupee deteriorated with time.
Thus, although it seems like your money gains 5.5% in compound interest every year, the value of your money in the bank is actually declining.
However, most private banks provide a higher interest rate than the official rate. Nevertheless, what I will show you will convince you that saving money in the bank isn’t as safe and wise as you think right now.
The Interest Trap
Let’s say you deposit Rs. 100 in a bank. If we simplify the interest compounding, you will get Rs. 105.5 after a year. However, what you bought with Rs. 100 a year ago can’t be bought with Rs. 105.5 because that same product now sells at a higher price due to inflation.
See? The banks are sucking your money every year. The only reason why anybody would save their money in the bank is to keep them relatively safe than keeping at home.
If you really want to stop working for money one day and get money to work for you, you gotta find a way to multiply the wealth you have.
And this is where investing comes. It is a promising source of making money work for you day and night.
What are the benefits of investing?
You will escape the inflation trap.
I already made it clear to you why saving your money in the bank might not be the wisest decision.
Except in rare cases, investing is always profitable if done for the long term. This is because civilizations prosper, countries develop, and technologies make things efficient and cheap. Thus, the entire world always moves towards the path of profitability.
However, the reason most people lose money is that their time horizon is narrow and they expect quick returns.
Moreover, some take loans to invest in stocks, which is the dumbest thing to do. What will you do if the company you invest in is great but the stock price is low when you are expected to repay the loan?
These are the reasons why investing breaks many men even though the entire mechanism is such that almost everyday profits in the long term.
Invest with your own money, invest with the right strategy, and invest for the long term. You will be on a path to financial freedom in no time.
Your money will work for you while you sleep
Founder-CEO’s are those who establish a company from scratch and lead them. Steve Jobs and Bill Gates are prime examples of people who took a revolutionary idea from air and built an empire on it.
Founding an enterprise and leading it is a world apart when it comes to the required skills. Doing both at once is a heck of a job.
On the other hand, you can simply invest in an existing company and claim ownership. Warren Buffett is an example.
James Quincey, the CEO of Coca Cola received $10,190,104 as compensation in 2017. Warren Buffett, however, made $592,000,000 just in the dividend income of Coca Cola stocks the same year.
After Buffett did his homework of researching, he did nothing for the company. However, CEO Quincey probably spent countless nights thinking about cutting costs and increasing revenue.
To sum it all, investing is a promising source of passive income once you implement the right game plan.
Your money grows exponentially instead of linearly
Most people have a wrong understanding of wealth. I did.
We think that more work must equal more income. Or that the longer you work, the closer you are to succeed.
However, this can’t be any further from the truth.
Most have a linear view of growing wealth, that you gotta work harder and longer to be financially free.
However, the problem is that we only have so many hours in a day and so many years in our life.
You should rather focus on creating wealth exponentially.
Do the math. How much will you make in 5 years if what you earn is put back to double and treble? What if you keep on circulating your cash this way?
Well, yes, there is no guarantee that your investment will give you fabulous returns every time, but you get the idea.
Stocks are only reflections of what is happening behind a company. Stock prices represent the overalls in a birdseye view.
Stock trading is done to transfer ownership from one party to another. Every transaction is made with the intent to profit.
You can make money work for you and multiply in the future with investing. However, you will need a concrete strategy and the skills to be a professional stock market player. Otherwise, investing in stocks isn’t very different from gambling.
Where to go now
This article only revolved around the general idea of investing and the stock market. If you are looking for a step-by-step procedure to enter Nepal’s stock market, these articles will be helpful: