Search engines on the internet are flooded with queries asking “How to become rich by investing in stocks?”
There are many other queries too, which are quite similar in nature to the above question, such as:
“How to become rich in the next ten years?”
“How to become a millionaire by investing in stocks?”
“How to become rich without huge investments?”
Well, the answers to all the above questions are quite closely related.
Before we proceed with the answer, let’s take a look at a real example
In the year 2003, a brand-new Maruti Zen would have set you back by Rs. 3.5 lakhs. Imagine if instead of buying a Maruti Zen car you would have invested the same amount in the IPO of Maruti Suzuki India Ltd. the worth of your investment today would be approximately Rs. 2.10 crores.
Imagine if you had invested the same amount in 4 other good companies, such as RIL, Infosys, MRF and Eicher Motors.
|
|
Jul 2003 |
Dec 2020 |
|
RIL |
3,50,000 |
1,03,25,000 |
|
Infosys |
3,50,000 |
78,97,272 |
|
Eicher Motors |
3,50,000 |
5,71,66,666 |
|
MRF |
3,50,000 |
1,84,74,510 |
|
Maruti |
3,50,000 |
2,10,00,000 |
|
Total Value |
17,50,000 |
11,48,63,448 |
The total worth of your investment would be worth a whopping Rs. 11,48,63,448. This does not include additional gains made by way of dividends or bonus shares issued if any. If we include that in the above calculation, the total worth of investment would be much higher.
Now let’s take a look at the worst-case scenario. Apart from Maruti if you had also invested in 4 low-quality stocks and all 4 turned out to be duds, eventually becoming penny stocks or wiped away even your investment.
|
|
Jul 2003 |
Dec 2020 |
|
Company X |
3,50,000 |
0 |
|
Company Y |
3,50,000 |
0 |
|
Company Z |
3,50,000 |
0 |
|
Company A |
3,50,000 |
0 |
|
Maruti |
3,50,000 |
2,10,00,000 |
|
Total Value |
17,50,000 |
2,10,00,000 |
From the above table you can see that even in the worst-case scenario where 4-5 of your stocks grossly underperformed, despite losing 80% of your capital invested, one good investment (shares of Maruti) would have still made you very wealthy.
Now let’s focus on the answer to the question:
“How to become rich by investing in stocks?”
To become rich by investing in stocks, one needs to do two things.
1. Invest in good companies
When we talk about investing in good companies, how exactly does one choose good companies?
2. Check the growth potential of the company
When it comes to finding good companies to invest, the company’s growth potential is one of the most important factors to consider. Look for companies with consistent growth in factors like revenue, sales, and net profits. Stocks of companies with an annual growth rate of 25-30% can be considered as good stocks to invest.
3. Low or zero debt matters a lot
When looking for good stocks to invest, it is vital to find a company with low or zero debt levels. An investor should strictly steer clear of companies with high debt as a significant portion of profits will go towards paying off the interest on the debt.
4. Visionary management
A Visionary management with visionary ideas can take a business to the next levels. Leadership is the key driving force which can steer the company towards new levels of growth but also help it survive during difficult times. A detailed look at the management pedigree is one of the best ways to identify good quality stocks.
5. Look for companies with monopoly
Companies which have a monopoly in their field due to economies of large scale or challenging entry barriers have a competitive advantage over other companies making them suitable candidates to be termed as good quality stocks.
6. Increasing return ratios
A detailed analysis of return ratios like Return on capital employed (ROCE), Return on Equity (ROE), Price-to-Earnings (P/E) are essential prerequisites which can help you in identifying good stocks to invest as companies with high and increasing return ratios indicates the efficient allocation of capital.
Few other questions to keep in mind for identifying stocks of good companies:
What is the future outlook for the company’s product or services?
Do you understand the company’s business model?
Is the stock available at the right valuation?
7. Invest for long term
Once you have invested in good companies, it is imperative to remain invested for the long term by ignoring the tendency to sell when you see your investment double or triple. Real wealth is created when you stay invested in stocks for the long term as the power of compounding kicks in, thereby generating phenomenal multibagger returns.
Key Takeaways
Investing in stock markets is both thrilling and tempting. Only those investors who can resist the temptation of booking profits on their investments for marginal gains by remaining invested in good quality stocks can create real wealth.
Click here to invest in a portfolio of 20-25 good-quality stocks with the potential to create exceptional wealth.
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