Would you say acquiring shares is a sure fire way of increasing your money?
We have learnt that keeping money in fixed deposit is not a good idea, when you grow up to be an adult and start earning money. This is because the interest income from the fixed deposit is taxed. After you pay tax, you may end up with only 70 per cent of your interest income (assuming that you are in the highest tax bracket). This doesn’t help us at all, as the inflation rate is rather high in India — close to 10 per cent annually.
What we need is a magic box that grows our money faster than the speed at which the inflation erodes our money. If the magic box grows our money at the same rate as the inflation, then our money maintains its purchasing power. If the money grows faster than the rate of inflation, then our wealth is actually growing, even after adjusting for inflation. Does such a magic box exist at all in the real world?
Yes, it does exist. This magic box is called “stocks”. Stocks are merely fractional ownership in businesses. For example, let us assume that the Coca Cola business is akin to a Pizza. Let us further assume that this Pizza can be cut into a million equal slices. Each slice is equivalent to one share of the business. What does a Share actually get you and how is this equivalent to the magic box?
If you ask most adults, they will tell you that stocks or more generally “stock market” or “share market” is similar to horse racing or casino gambling. And here we are thinking that this “Stock Market” is our magic box that will help us grow our money faster than inflation. Which of these is true? And why? We will see the answer in our next column.
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Young World Money-Wizards Quiz # 30: What is the oldest stock exchange in India?
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