How does Stock Market Creates Wealth

1. Hedge against Inflation

As an investor, you must keep in mind that inflation is the real deal. If one does not take into account the impact of inflation on their wealth over the years, the entire process of wealth creation can go wrong. In the current economic scenario, investing in equities can be beneficial as a hedge against growing inflation.

Historically, stock gains have consistently outperformed inflation rates. Increased profits for businesses can result from higher prices, which in turn might raise share values. Growth stocks have been observed to outperform the broader market and offer a reliable inflation hedge. Thus, it helps in creating wealth over the years.

2. The magic of Compounding

The power of compounding means earning income by reinvesting the interests earned.

Mr A and Mr B both invest $ 50,000 each in an investment avenue that offers an annual interest rate of 10% for 10 years. While Mr A chooses simple interest, Mr B opts for compound interest (read re-invest). At the end of 10 years, Mr A would make a total corpus of $ 100000. On the other hand, Mr B would earn a corpus of &.$ 130000.

In essence, compounding performs better the longer you invest.

3. Taking advantage of Capital Growth

Investing in stocks is a wise strategy that most long-term investors are aware of. The underlying idea of creating wealth through stock market investments is to buy low and sell high. You might anticipate making money when you buy in stocks due to capital growth. The reason behind this is capital gains. Capital gains are defined as an increase in share price.

4. Earning through Dividends

Along with capital growth, investors can benefit from dividend pay-outs on their assets. A dividend refers to the part of profits earned by the company which it shares with the shareholders of the company.

In many cases, the company will only distribute a fraction of its profits, keeping the remainder for purposes like buying new assets, stock buybacks, and corporate expansion. Dividends are distributed based on both the quantity and quality of shares a shareholder holds.

5. Regular Passive Income

When one invests in stocks, companies pay them dividends and also offer various other benefits like the opportunity to subscribe to the bonus shares. Thus, an investor can start earning passive income (which is supplemental to their salary) and use this money to create more wealth.

6. Better Returns as compared to other Deposits

Traditional investment instruments like fixed deposits and recurring deposits are safe but only offer fixed returns for the duration of the investment.

On the other hand, stocks, debts, bonds, ETFs, commodities and other stock market instruments move with the market, and offer premium returns.

Thus, one can achieve their wealth creation goals quicker with the same investment amount by allocating a portion of their assets to stock market investments and creating wealth swiftly.

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