What is Investment? Why Invest? Why Invest in Stocks ?

WHAT IS INVESTMENT?

Investment is nothing but parking your income/cash somewhere with an expectation or assurance of interest/dividend or capital appreciation or both (an instrument, of asset class). If you have cash piled up in a locker it is not an investment, it is merely currency or cash amount. Your bank savings account also doesn't come under instruments as it gives only 3-4% return and meant for primarily parking your cash rather than investment.
(However recently some banks have started giving 5-6% interest on savings bank account as well however their minimum criterion is to keep a minimum balance of 1 lack and above)

INVESTMENT OBJECTIVES:

Investment is done for following objectives,

• 1.    Beating rate of inflation
• 2.    Gaining return on money in access of over and above rate of inflation
• 3.    Gaining capital gains
• 4.    Specific Goals (fulfillment of financial planning goals etc.)

DEVASTATING EFFECT OF INFLATION ON YOUR MONEY:

This is how increases your expenses every year and how value of your money declines every year. You can see in the image how inflation rate of 5% increases the amount of your same expenses every year and decreases the value/purchasing power of your savings if not invested.

We have calculated only 5% rate of inflation but as you know the inflation rates are soaring above 7% to 10% many times in this globalized world and due to rising crude oil and commodities prices.

  

WHY INVEST? AND WHY INVEST IN STOCKS?

So, from the above image you can clearly see how Sensex/Stocks have outperformed inflation, which is the first objective of any investment, and given higher return over and above inflation and Bank Fixed Deposite or so called risk free investment instrument as well. This calculation is for over 30 years. But if you look at the history of entire stock market all over the world, equities have always outperformed inflation and debt instruments.

So, it is clear now that one must have investments into equities.

  

THE POWER OF COMPOUNDING RATE OF RETURN:

Just see the difference of investing 5 years more and 3 lakhs rupees more. It is a whopping 71.04 lakh rupees. You can calculate yourself to make sure!

You can also relate this to understand that Mr. B started investing 5 years earlier than Mr. A and look at the difference. So this also signifies the important of starting investing as early as possible.

Below you can see, the same calculation showing power of compounding rate of interest if rate of interest is 15%.

Now we will see below what happens to your investments if the rate of return is 20% on compounding basis.