None of us can work for the entirety of our life. One day we have to retire and relay on wealth we have accumulated throughout our lifetime. But the majority of the world’s population is not ready to retire. Hence planning your finances as early as possible is a beneficial idea. One way to do that is to build a stream of passive income. It is a system that keeps producing income with zero effort. It can be a house you give on rent, a youtube channel or mobile app with ads running on it or if you have some cash sitting around, you can use the stock market. The last option is the one with the least effort in my opinion and the one I implemented the first.

The stock market can create huge wealth if given enough time. I am talking about millions! I will walk you through the basics of the stock market, what exactly to do to create such an amount of wealth (with proof) and finally show step by step how to do it. So let's get started!

A B C of The Stock Market

People who know what the share market is and how it works can skip this paragraph, others get ready to learn it! The stock market is, as the name suggests, a market. Where people buy and sell stocks/shares. Stocks are nothing but a part of a company. You can imagine a company being a pizza and stocks are the slices. When you buy a stock you buy a portion of the company, i.e a slice. Bigger the slice you have more control you have over the company. So as a company grows bigger your price of the stock also increases. Coming back to the pizza example, if you have ¼ of a pizza and now the pizza doubles its size. The same slice will be bigger but still 1/4 of the pizza.

If you buy a few stocks of a small company and wait for it to grow to a larger size, then your stocks price will also increase.

What exactly do I mean by a company growing in size? It is its market value growing. Market value is number shares which comprise of the company multiplied by the price of one share.
The prices are decided by the people in the market. If the majority of the people start buying a stock then the price increases else it decreases. Hence investing in only one company is very risky. That is the risk which everyone warns you about. But if do not speculate and invest intelligently then you can make money with almost 100% guarantee. Let us see how we can do that.

As we know investing in a single stock is not the best idea. Instead, we should in invest in many different companies, like an index. Investing in an index has many benefits. Let us say you invest in Nifty 50 and in that 10 companies share price decreases but because your money is invested in all 50 you will still gain. Like this, you minimize the risk and you are investing in the economy as a whole. If the economy does good, means top 50 companies did well, hence you gain. Another reason to invest in an index fund is that the weightage of each company is not the same. Bigger blue chip companies have greater weightage. This means that if you invest a rupee 1 in Nifty then the proportion of a rupee invested in each company is different. TCS(larger company) will have a larger portion than MRF. This weightage naturally gets rid of low performing stock. Which means when we invest in an index we make sure we are always investing in good performing stocks. There are several indexes in India based on sector and Market Capitalization. And the general public can invest in them using index funds and ETFs.

The Passive Income System

Now when we combine our knowledge about index funds and compound interest. Yes, what you had learnt in your 10th standard! We can build a system that generates a huge amount of wealth with zero effort. It is a SIP. You invest a fixed amount of money every month in an index fund. It sounds simple and you might have already heard about this but doing it with mutual funds. Let us appreciate how powerful this system is with numbers and then understand why to choose index funds over mutual funds.

The Power of Compounding

Einstein regarded compound interest as the 8th wonder of the world. He understood how powerful it is. Remember in 10th class you found the difference between simple interest and compound interest over time? It turns out the difference grows exponentially. A stock market is a place where we can get compound interest on our investment. Let us visualize it through an online compound interest calculator. Open it and do the following configuration.

We will calculate how much our money would have grown to if we had invested it 30 years ago in Sensex. Interest rate is 15% because on average Indian markets grow by 15% annually. As we can see if we had invested ₹1000 30 years ago then today it would be ₹87,541.00.



Notice how the graph grows exponentially. Hence more you wait your money will multiply faster.
Let us see a practical example. Open up the online compound interest calculator again and do these configurations now:



So you will start by investing ₹10,000 and then invest ₹5,000 monthly (adjusted with inflation) for 30 years. The numbers are very economical. Any working young individual can afford more than this.

After you click on “Calculate”, you will see after 30 years you will have ₹53,731,315.92. That is 5.3 Crores! So if you started this at the age of 20, when you will be 50 years old you will have 5.5 Crores. Again remember you can achieve this in a smaller span by increasing monthly investments with your career growth.

One thing to notice is that 25th year of your investment, balance is only 2.4 Crores. In the next 5 years, your balance more than doubled to 5.3 Crores. That is the power of compounding. Wait a few years more and it would double again.



Now we know the power of compounding. Next, let us understand why to use index funds over mutual funds quickly. One of the main factors to choose index funds is the fee associated with them. Mutual funds are actively managed hence they charge a fee for that. That fee is in terms of percentage of investment. As we saw over time our investment will grow quite large. Hence we will end up losing large sums of money in fees. Index funds are passively managed, they follow already existing index so fee charged is lesser. Moreover, historically index funds tend to perform better than Mutual funds. Check this playlist on Youtube for more in-depth knowledge.

Building the System Using Zerodha

So after knowing the system let us learn how to build it. Now here is where the content will be in context to India only. If you are not from India, the system remains the same but you need to learn how to implement it in your country.

There are broadly 2 ways to build this. Using an index fund or ETF. We are going to learn how to do it using ETFs. By learning this way we will also learn how to invest in normal stocks. Later on, if you want to invest in individual stocks using Fundamental Analysis.

We will be using Zerodha to do this. You will require the following documents.
  1. PAN CARD
  2. Aadhar Card 
  3. Cancelled cheque/ Bank statement
  4. Your Signature on a piece of paper
  5. Passport size photos
After collecting them go to this page and sign up. Opt for free equity trading account. You can refer to this article if you need any help while signing up.

Activation of your account can take a few days. You can bookmark this page come back later when it is activated. Meanwhile, you can check out our Instagram page!

Buying Your First ETF

Once the account is activated. Log into it. Add funds by going to the “Funds” tab. Then search for Niftybees, it is an ETF which follows the Nifty 50 index.




Click on it to add to your watchlist. Now hover over it and click on buy. Then this window will pop up.




There is a lot of stuff going over here but do not worry, you need to only change the quantity, i.e number of units of ETF. Then click on buy. That's it you just bought your first ETF!
NiftyBees, in my opinion, is the best ETF for stability and growth. Also, the volume is higher compared to other Indian ETFs. So you can sell whenever you want.

If you want to withdraw cash from your account it is possible by going to the "Funds" tab and clicking on "Withdraw".

That is how you will make sure no matter what you do in your life, while you are maintaining this habit of investing monthly, you are bound to be wealthy.

The Precaution

One more thing before start investing, invest the money that you will not need in the short term. There are almost zero chances of losing all your invested capital but as a precaution, it is best to practice this.
I hope you understood the importance of the stock market when it comes to creating wealth. Start investing as soon as possible to get the maximum benefits of compounding and continue as long as you can. Comment your questions and thoughts on this article below.

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Terminologies:
Index: It measure’s the performance of a basket of companies
Nifty 50: It is an index of India’s top 50 companies.
Sensex: it is an index of India’s top 30 companies.
Blue Chip stock: It is a huge company with an excellent reputation.
Compound Interest: Interest is added to the principal amount and then next period's interest is calculated.
SIP: Systematic Investment Plan, investing some amount of money every month
Sector: Companies are categorized based on what aspect of the economy they are dealing with
Market Capitalization: It same as market value, the number of shares outstanding multiplied with the price of each share
ETFs: Same as index funds but you can buy and sell them like a stock on the stock market
Fundamental Analysis: It is deriving the value of a company using its fundamentals like balance sheet, ratios, income statement etc.
Volume: It is the amount of time a stock is bought and sold during a period.