RAGS TO RICHES | Invest Like a Beginner! (Part 2)

An illustrated image of three people engaged in different forms of gardening. The leftmost is picking carrots, the middle is planting seeds and the rightmost is watering plants.

Rags to Riches is a monthly column published for the ArtNowThus Blog and Newsletter. Meant for creative professionals, freelancers, artists - anyone really who hasn’t yet quite figured it out and needs a place to start from scratch. Put together by Ragini with the help of experts, and heavily aided by stories, puns, memes and examples - this is a finance blog you will actually want to read (and hopefully put to use in your personal finance lives).

Written by Ragini Singh Khushwaha, founder of ArtNowThus and subject matter expert on the arts, media and content, cats, random factlets from around the world and productivity hacks.

With inputs fromSakina and Husein Merchant, Chartered Accountants who attempt to bring out their best selves by combining their professional skills and their love of being around and learning from other creators.

We are back with the second part of our Invest Like A Beginner series, where things now get sexier and so much more fun! This time I take you through the story of the beginner and stock market - a push-pull romance for the ages.

For a lot of us in the creative industries, work is often freelance and money is sporadic. When you don’t have the luxury of a fixed income, it’s easy to switch over to living paycheck to paycheck. You can’t plan your finances so you take it as it comes - it’s just the way it is. It takes one unplanned expense (and as anyone who’s ever tried to keep a tab on their budget will know, these have a habit of showing up with annoying regularity) for that entire savings plan to go askew. In a world before Rags to Riches, I used to believe that everyone except me had their financial shit together. Ever since I’ve started writing this blog, I’ve had a number of conversations with so many people and I’ve come to realise, most folk don’t really have a clue either. And it is this very reassuring thought that has kept me going - I’m not alone, and therefore neither are you. No matter how clueless or overwhelmed you feel when it comes to getting your finances together, there’s a bunch of people out there as messed up over it - I promise you that.

An illustrated image of a red panda smiling.

So keeping that thought in mind like a personal Patronus to shield you from the Dementor that is financial anxiety, let’s talk about the stock market.

In the previous edition, I talked about investing in Fixed Deposits and how it was a great place to get started at. The advantage of an FD is that you are almost guaranteed a fixed return on your investment at the end of the term.

Probably Relevant Side Note: I highly recommend reading part 1 if you haven’t already btw. It’ll really set the stage for this part.

As safe as an FD is, in most cases it is likely to yield a lower return on your money than investing it in the stock market. And one of the biggest reasons to invest your money is to generate wealth. You’re hoping to make more money on your money. And so while it is important to have some safe investments, it’s also important to make a few investments that will give you a higher return, ergo generating wealth.

The easiest place to start going a little bit bigger is the stock market!

So, question 1: What is the stock market?

One fine summer day some time in the 1850s, a group of traders sat down opposite the Town Hall in Bombay and began trading. And thus began the stock market in India. (I’m obviously over simplifying the tale but to make up for that, if you’re ever in Mumbai reach out to me, and I will remote guide you to the site of the first stock market set-up in India.)

By 1875 this informal group of traders had moved to the place that is now Dalal Street, and organised themselves into the Bombay Stock Exchange that we all know and love today - the oldest stock exchange in Asia.

With that history trivia out of the way…

…the stock market is basically a group of companies that sell pieces of themselves (shares or stocks) to the public in return for the promise that when they generate profits, they will share those with the public that gave them money.

Let me illustrate. Assume ArtNowThus is valued today at Rs. 2L. I ask you to invest Rs.1L in ArtNowThus and in return I offer you half the company.

Probably Relevant Side Note: The value of a company is an assumed number given to the company by an expert, based on a bunch of financial facts about the company. It’s basically how much the company is potentially capable of earning and how much it’s potentially worth. Once you know this, it’s easy to split the company up into shares and give a value cost to each share.

Now you happen to have some spare cash to invest and find the business model compelling. This convinces you to give me the money because you believe the business will be profitable in the future and will generate higher returns on your investment, increasing the value of your money. So there are two halves or shares of the company, and each share is valued at Rs.1L (1L from you and the other 1L from other sources that constitute 50% of the company).

Obviously not every company can take money from the public at large - it would be chaos and a sea of misinformation. So in order for a company to offer itself to the public, it can only do so only after it ‘goes public’ - which is basically a big deal in the financial world, where the company reveals intimate financial data in order to get listed on the stock market as a publicly traded company. They do this so that the public (you and me) finds them trustworthy and promising, and therefore gives them some part of our money to own some part of them. Imagine the company is a potential love interest, sharing their innermost self with you in order to woo you to give it a chance. They’ve charmed you with their valuations and stories, they’ve gained your trust by their financial revelations and now you give this relationship a chance by investing money in them. #TruLove

An Illustrated Image of a red panda looking smug on the left and a corporate building releasing hearts on the right

Question 2: What happens to my money after I invest it in the stock market?

I’ll bring us back to our earlier example.

Three years have now passed since your original investment. ArtNowThus has done very well (claps all around) and is now valued at Rs. 5L. This means your original Rs.1L is now worth at least Rs. 2.5L. Not bad at all, I’d say!

So as long as the company you’ve invested in makes money, as a shareholder, so do you. The amount of money you make on your investment over a period of time is called the returns on your investment.

Most folk who invest in the stock market do so because (like you in our example) they believe that the companies will do well and produce more value and income, and therefore their value will go up - in turn leading to the value of their shares going up. They use historical data and expert opinions to back this belief up, and so are carefully optimistic about the future of their money in the stock market.

Having said this though, it is well known that companies don’t always go up in value. It’s why the famous stock market graph is a bunch of zig zags instead of a steady up graph (we’ve all seen it, even if we don’t understand it).

An Illustrated Image of a red panda making a scared face at falling stocks.

While we make money when a stock gains in value, we also lose money when the stock loses value. This can happen for any number of reasons expected and unexpected. An example you might be familiar with is when Covid lockdowns disrupted the operations of many companies, causing them to lose income or shut down entirely. This is only one of the many many reasons why a company loses money. Companies make and lose money - it’s what they do.

Say at the end of this three-year period, ArtNowThus loses money instead. As an investor, you would lose your money as well. That’s why if you have Rs.1L to invest it would make a lot more financial sense to invest this over 100 different media start-ups and give each a portion of your money. Of these, at least a few are bound to do well and your shares here will yield you money keeping the overall value of your investment safe.

Assumptions when you invest in the stock market will always essentially be educated bets. But diversifying where you put your money, keeps your money safe.

Question 3: How does investing in the stock market work?

This is where I’ll tell you how I do it. I am fairly risk averse as a person in general, and I’m not big on surprises (the entrepreneur life is going really well for me, thanks for asking!). So even though I do invest in the stock market, my approach to investing is fairly conservative. I invest small amounts of money; monthly in mutual funds.

Probably Relevant Side Note: A mutual fund is basically a pool of money in a fund per se. The money is pooled in by multiple investors (people like you and me), and the fund as a whole is managed by professional money managers who make decisions about what that entire pool of money should be invested in. So basically as an investor, you’re investing ‘mutually’ with other investors (clever eh) to partake in whatever investments the fund is putting the money towards (and are eligible for a portion of income these generate based on your investment).

Personally, I didn’t feel like I could track the markets regularly in order to make investment decisions, and with regards to the decision-making itself I felt like I trusted a professional over my own skill set here (hi Husein!). So with Husein’s help I made decisions about how much money I could afford to set aside towards investments each month. Once we knew the amount we were working with, Husein sat me down and explained an investment plan to me (with grrreat patience, answering my most basic questions - repeatedly, I might add). Once I agreed to the plan, Husein then set up my investments for me. I literally had to do nothing more, except make sure there was enough money in my account for the investments month on month, everything else is fully automated and managed by Husein and Sakina for me. There’s also a nifty little app I can use to track how well (or not) my money is doing, and Husein is always a phone call away in case I have any burning finance questions I need answered.

Probably Relevant Side Note: Investment advisors get their remuneration from making investments in multiple ways so it is important to have that conversation with them and know this before starting the process. If they get paid through the fund directly - which is what happens in my case - you will not need to pay them any money upfront (I really love automations!).

Finally, question 4: How much should I invest?

An illustrated image of a red panda sticking its tongue out, with text that reads, "The answer is so simple. As. Much. As. You. Can."

The answer is so simple - as. much. as. you. can. Investing isn’t only for the rich, investing is how you get rich. So start with a 100/- or 500/- or 5000/- or 50000/-. Whatever you can, whenever you can and how much ever you can - get going with it. I’ll see you all in a month, lighter on the savings account and richer in your net worths!!

The Big Fine Print:

We’d like to establish that while the principles outlined in this section should pertain to anyone, we’ve put this together with a focus on creative professionals and freelance workers. Also, while we do have Husein and Sakina consulting with us on this column and keeping us straight, we’re not financial advisors. This column is for informational and recreational purposes only and in no way meant to offer advice or recommendations.