Tuesday, September 16, 2014

"Is dividend the same as preference shares?": Challenges to Equity Investing....

On a recent weekend, I was flying down to Bangalore from Mumbai.

There was this dignified gentleman sitting next to me. The flight was delayed a bit and we got chatting, starting off with cribbing about how the flights have started getting delayed of late. He was telling me about the 'Flight Delay Paradox', in that the flights that you genuinely want delayed (early morning flights, for example) are never delayed and the flights that you don't want delayed, the ones which are taking you home, are the first ones to be impacted by the delay.

This gentleman is working as Vice President Marketing of a multi national corporation. He was in Mumbai for a customer visit. He is an Engineering graduate with an MBA from a leading management institute in India.

Airline bashing stands next to weather and 'So what do you do?' as great conversation starters. It breaks the ice pretty quickly.

We got talking about investing. I told him that I am interested in equity investing and have been doing that from about 2004, with mixed results. In my opinion, currently, the Indian markets are poised for a very good appreciation. It is time to invest in Equities, I told him.

"What kind of returns can I expect?", he asked me.

I went into a conceptual discussion of two forms of returns from equity. One is in the form of dividend and the other is in the form of capital appreciation.

"What is dividend?", he asked me, "Is it the same as preference share?"

I was dumbstruck. The fact that a senior professional with an MBA from a leading institute in India did not know the difference between dividend and preference share was inconceivable to me.

That set me thinking. If a highly educated and highly qualified professional did not have the basic idea of investing and finance, then what chances  do other less qualified people will have? Only about 3% of the investible surplus in India is invested in Equity.  Government is trying its level best to encourage people to move their savings to equity. Long term capital gains tax on returns from equity is zero if the investment is held for more than 365 days. Mutual funds spend tons of money in putting up advertisements encouraging people to invest in equities through SIP route. Indian markets are in a bull run that is expected to continue for another 4-5 years.

To what purpose?

You ask a common man whether he invests in equities and the stock answer is 'I don't like gambling'. The perception is deep rooted that equity investing is like gambling. The same guy will have no qualms about paying 2000 per square feet for a parcel of land with the intention of selling it after one year at 3000 per square feet. Isn't that gambling?

The problem is that equity investing is complex and calls for a basic knowledge of Finance. One has to understand the concepts like PE, PB, PEG, Dividend Yield, Earnings Yield and Shares. Just like any other investment, for an investor to make serious money, s/he will have to learn some concepts that drives markets. Also, one has to invest when the prices are low. If you do the basic work like learning the basic concepts and buy low, one is virtually guaranteed to make money in stock market. However, many investors wait till market has run up to invest. And they have an intention to sell very quickly. The combination of above two, vis. buying when prices are high with an expectation to sell in a very short time, will convert equity investing to Gambling. 

What my experience shows is that we have a lot of work to do to change the investors savings habits from Bank FD to Equity Investing. It can be done. After all, if we can move people from investing in money lenders to investing in Bank FDs, we can move them to invest in equity. Equity investing is risky, definitely. So is bank FD. Who can forget the failure of Global Trust Bank and the concomitant loss to the depositors. Equity investing has its advantages, low taxes, capability to beat inflation, significant appreciation potential over the long-term etc are some. 

Education is the key. We need to put a lot of effort in educating the common man about the benefits of investing. 

Teaching the difference between Dividends and Preference Shares is a good start.

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