The idea of building wealth seems to spark up a lot of debate as people try to figure out the best means for them to do so. Many seedy establishments promote “get rich quick” programs looking to lure those into transactions they may not otherwise take seriously. The practice of investing has been long known to be a great wealth creation tool. However, how closely is the idea of building wealth closely tied to investing?
A value investor would argue that investing over the long term is key, while a day trader would state that market moves are best made moment to moment which is how wealth is created. When investments are carried out for the longer term, the power of compounding works towards your goals. All the more, if you have carefully selected the right companies to invest in that generate good returns, it is probably not in your best interest to sell off the stock and store the money in your bank account. Keeping stock available for the long term in your portfolio is the key when it comes to building your wealth. The question here is: how long?
The short answer: it depends on your goals. Nevertheless, it is essential to remember that for successful investing, being scrupulous is necessary. It can take years of your time to invest intelligently in any market — be it bonds, stock, commodities, or others. In fact, most people tend to expect that they will instantly make money when they start investing. This is a fault way of thinking as wealth can rarely be created in the short term. Short term is defined as under five years. When it comes to the majority of good stocks, these can take at least two to four years to show a potential yield for most investors. When investing, opting for a six-month option is only good for minor profits, which is very different from building wealth.
How do investments build wealth?
So even though there are many investing options available in India to choose from, the manner in which these investments pay their investors is what varies. Here are some of the ways in which the different investment options in India help one earn.
Earning from capital appreciation
This method is commonly known by most stock investors as a way to build wealth. The idea is to buy low while selling high. When investing in stocks, you can expect yourself to mean money through capital appreciation. This is known as capital gains when the share price increases. Profits from capital appreciation can go as high as +1,000%. These are known as ten-bagger stocks. Keep in mind that, even for the stock that is considered safe, there is no assurance that its price will rise in the short term.
Earning from dividends
In addition to capital appreciation, investors can also earn through the income they make from dividend payouts on their holdings. A healthy company or mutual fund is likely to distribute its profits to its investors in the form of dividends. In many cases, the company will partially distribute its profits while keeping the rest for purposes like buying new assets, share buybacks, and business expansion. Dividends are distributed based on the number of shares an investor holds in the company, as well as the quality of shares they hold.
Let’s say a company decides to give its investors ₹10 per share, then the face value of this share is ₹10, and it is referred to as a 100% dividend. The key point to keep in mind here is that dividends grow significantly over time for companies that are fundamentally strong. If the dividends from stocks are likely to consistently increase over time, this means that the net income of the investors of those companies will also increase.
Wealth creation over long-term
Wealth creation stores are interesting because stocks like Wipro, MRF, and Infosys while stocks were worth ₹1000 in the early 1990s are now worth multiples of crores just 30 years later. For most people, a stock cannot be kept for such a long time frame. It is not only inconvenient but also very tempting to sell the stock off and book one’s profits. This is why many wonder if true wealth can really be created unless one is committed to holding their stocks for at least 20 years.
However, what is conveniently ignored is the fact that the investment that was held for such a long time frame was also ₹1000. The more one grows in terms of income, the more likely they have the monetary ability to increase how much they invest. Over the years, seeing the performance of the stock, it is likely that investors grew how much they were investing in these stocks. It doesn’t make much sense to invest just ₹1000 if you already know the progression of this amount when it comes to growing wealth. Hence, most investors would likely have increased the amount they were investing over time.
Ultimately, this would have led to generating more returns in a shorter amount of time. Hence, wealth can be created sooner than one thinks, as long as they take into account the investment amount. For the sake of simplicity, the common assumption by analysts is that an individual simply invested ₹1000. The fact of the matter is that most investors steadily increase the amount they are investing in all the different kinds of investment options in India — be it mutual funds, bonds, stocks, etc.
The bottom line
Even if you avoid keeping your stocks for twenty to thirty years, as on as you increase the amount invested and focus on fundamentally strong companies, it is likely that you will be able to amass wealth sooner than anticipated. The key, however, is to avoid delaying this process any longer and start as soon as possible.