Weapon to fight Inflation

We normally play three roles saver, borrower and investor; keep on switching between these three.

Savers: the saved money is used in future for satisfying needs when the earnings get stop and rainy days starts.

Borrowers: spends more than his earnings. He hopes in future he will earn enough to fulfill his primary requirements and also repay his creditors.

Investors: have sparkles in their eyes. He invests in his business and figures out that he has taken up the biggest challenge and has to prove himself.

Let’s see the example to see the relationship between the borrower, saver and investor.
You have Rs 500; you have two options either buy shirt or buy it after six months. It’s true that the same shirt will cost you Rs. 550 after six months. So, what to do? First answer will be to buy a shirt today; thereby you will save money by buying shirt of Rs. 500.

Now, assume that your friend needs that Rs 500 urgently and willing to return Rs 550 after six months. What will you do then? You will give him Rs. 500 and buy the same shirt when he returns money back.

Now, assume that your friend promises to return you Rs. 600 instead of Rs. 550 after six months. You will give him Rs. 500 without a second thought and buy same shirt after six months at Rs. 550 and save Rs. 50.

In the example, borrower is willing to repay higher sum to compensate lender for the loss of his purchasing power. Hence, from this we learnt that:

• Savings does not make any sense if it does not compensate inflation.
• You need to be compensated at least for the loss of your purchasing power to boost you saving instinct. Here you compensate for inflation.

Now, let’s have a look on simple arithmetic:

In first assumption, you lend Rs. 500 to your friend and he returns Rs. 550 after six months; thereby he gives you Rs. 50 extra when he returns your money. While in second assumption, he returns Rs. 100 extra. The money you lent him is “principle” which Rs. 500. And the extra is the “interest”. Interest paid on the principal is the percentage of the principal. In first assumption, interest rate is Rs. 10% and in second it is 20%.

Hence Interest Rate is the aid to the saver by compensating the damages caused by inflation. While borrower has to think twice before borrowing as he has to pay the cost.

Now, what is the relation of Investor with the borrower in inflation? Investor uses his money to invest in his business. In above example, we have seen that investing is uncertain as many things may go wrong. Hence investor will go ahead expecting rewards offset the risk. Hence he will opt to lend his money to borrower to make as much as profit out of interest.

Conclusion:

Borrower rush to borrow more to spend now; Investor finds higher profit from its business. Saver is at the receiving end and insists on higher Interest Rate reestablishing the balance. Borrower and Investor have a distinct advantage when Inflation rises and interest swings the balance of power back in Saver’s favor.
]]> http://www.investingstock.info/2010/08/22/weapon-to-fight-inflation/feed/ 0 http://www.investingstock.info/2010/08/17/what-are-mutual-funds/ http://www.investingstock.info/2010/08/17/what-are-mutual-funds/#comments Tue, 17 Aug 2010 13:05:50 +0000 admin http://www.investingstock.info/?p=13
Mutual funds are collection of money came from investors with an intention to invest into the industries having better prospectus. It is a pool of money invested in stocks, bonds, securities, infrastructure, telecommunication, energy, short-term money-market instruments and so on.

In eighties, process of economic liberalization brought dramatic changes in Indian industry, corporate sectors and the capital market. With this there was a demand for new financial services such as issue management, corporate counseling, capital restructuring and loan syndication. In eighties, UTI was holding the monopoly in mutual funds market but in nineties several public and private organizations took permission to setup mutual funds.

There are large number of investors who does not have enough time, knowledge, experience and ability to take financial risk to play a monetary game in stock exchange and earn income from the same. They do not have capability to manage their money. Mutual funds came into the market and penetrated so quickly to satisfy the investment need of these investors. Investors can seek a guidance of portfolio manager to minimize financial risk and ensuring safety and steady returns on investment. Portfolio managers are the professional fund managers who work on behalf of Asset management Company (AMC), guide you and manage your investments. AMC gives a management fees to these managers. Investors make money by earning dividends or on the investments and by selling securities that are appreciated in value.

There are two types of mutual funds: Open-Ended and Close-Ended funds. Investors can buy or sell open ended mutual funds at any time for the market price i.e. it does not have any locking period; they does not have a set of numbers of shares, they are always open to accept investment from investors. Normally, fund managers are the major players in open-ended mutual funds. Whereas Close-end mutual funds has a fixed number of shares and the value of shares fluctuates with the market. The investors can go for close-end mutual fund at the time of launching or buy from the current investors. Mutual fund is a piece of investment portfolio, investors’ gains and losses in share and expenses in amount of proportion of their investment.
]]> http://www.investingstock.info/2010/08/17/what-are-mutual-funds/feed/ 0 http://www.investingstock.info/2008/07/04/book-building-all-that-you-wanted-to-know-about/ http://www.investingstock.info/2008/07/04/book-building-all-that-you-wanted-to-know-about/#comments Fri, 04 Jul 2008 16:18:40 +0000 admin http://www.investingstock.info/?p=10 Very often, you would have come across term ‘book building’ especially with regard to primary market or IPO process. Let us have a look at book building and what it means to you as an investor in securities market.

Book Building Process
Book building is a process of price discovery in case of IPOs. When Companies come through the book building route, the price of the issue is not fixed before hand. Rather the issue document only gives a floor price or the price band within which investors can bid for the shares. The IPO applicants bid for the shares being issued by the company quoting the price of their bid and the quantity that they would like to bid at. Only the retail investors have the option of bidding at ‘cut-off’. Cut off means that the investors are not active bidders but they are willing to accept whatever price is getting arrived at based on bidding done by other persons. After the bidding process is complete, the ‘cut-off’ price is arrived and shares are issued to successful applicants.

What is a price band?
Price band in the book building process refers to the band within which the investors can bid. The spread between the floor and the cap of the price band is not be more than 20%. In other words, it means that the cap should not be more than 120% of the floor price. It is up to the company and its merchant bankers to decide on the price or the price band of the public issue. There is no cap or regulatory approval needed for determining the price of an IPO. The only requirement is that the issuing company is required to disclose in detail about the qualitative and quantitative factors justifying the issue price.

How is the Retail Investor defined as?
‘Retail individual investor’ means an investor who applies or bids for securities of or for a value of not more than Rs.1,00,000.

Can a retail investor also bid in a book-built issue?
A retail investor can bid in a book-built issue for a value not more than Rs.1,00,000. Any bid made in excess of this will be considered in the HNI category or High net Worth category.

What is “online bidding”?
A company bringing out an IPO can use the infrastructure of a stock exchange for on-line system offer of securities. An investor desirous of making the application may place his bids through the online terminals offered by some of the stock brokers. This is the easiest way of investing in IPO, where broking houses such as ICICIdirect.com, Kotak Securities, Geojit securities etc, offer their clients to invest in IPOs through click of the button.

Let us have a look at a few of the advantages of investing in equity and how equity investment helps you achieve both short and long term financial objectives. Your equity investment offers you the following advantages:

Dividends

Dividends are the periodical returns generated by your investment in the share capital of the company. This is your regular income if the company is performing well and is a reward for taking risk of investing in the capital. Companies generally reward their shareholders through dividend pay-outs, which give an indication that the company’s financial and profit situation is pretty good.

Bonus shares

If the company is sitting on a huge reserve, it also rewards its shareholders by issue of bonus shares. Bonus shares are additional shares allotted to existing shareholders on some predetermined ratio such as 1:2, which means one additional share for every 2 shares held by the shareholder. These shares are allotted with having to pay anything and hence the acquisition cost of investment is reduced to that extent.

Rights issue

Rights shares are allotted to the existing shareholders at a discount to the existing market price. The difference between bonus and rights is that while bonus is free, for rights, shareholders have to pay the discounted price. However the shareholders also have a right to renounce the rights, if they feel that the price is not worthwhile for them to make additional investment in the company

Capital appreciation

This is one of the foremost reasons for investing in equity capital of a company. Investing in equity capital at appropriate price levels can see your investment value jump significantly over a period of time. Capital appreciation is the reward for risk bearing and hence your wealth may see an upward movement over a period of time as the share price of stocks in your portfolio increases. This is by far the most important factor attracting people to invest in capital market.

Liquidity

Liquidity in the form of converting your investment into cash in times of need. This means that equity investment is one of the most liquid investments possible and you can safely invest therein, being fully rest assured that your investment is easily convertible into cash as and when you require converting it into cash.

Read more on Stock Nomination – www.stockandsharemarket.com

Stock brokers offer services such as buying and selling on behalf of investors. They also provide advisory services. If stock brokers are also registered as a portfolio manager, they can offer PMS services. Some of the bigger brokers also publish their own research reports which are available at a cost for investors.

What to expect from a stock broker? What are your rights?
A stock broker is obligated to give you prompt and efficient service, make timely payment and give delivery of shares. He is required to execute your orders on the stock exchange with utmost sincerity and exercise due diligence. He is also obligated to issue you contract notes indicating your transactions for the day. Insist on this. Always be aware of your rights.

 Read more on Stock brokers

Stocks are one sure shot of making money if you are able to pick up the right ones at the right time and exit at the opportune time. One of the major mistakes people make is that get emotionally attached to their investment and fail to see the market trends to exit. Just remember that stock trading is an art and the sooner you master it the better it is for you and your finances. Let us have a look at some of the nuances of stock trading and ho you can start in the right earnest.

Stock trading refers to buying or selling of stocks either for the purpose of holding it over short term, medium term or long term. You may also be a day trader where you take a very short term horizon of the market movement of securities and thus take a short term bet. In both these cases, you expect the market to move as per your expectations and thus make a killing in the process.

If you are a long term player, stock trading will involve opening an investment account with a broking outfit and placing your orders to buy or sell with him. You will need to make a initial deposit with your broker to take care of margin requirements and other obligations. The broker will buy or sell securities as per your directions and transfer your securities to your account. If you have given the mandate to your broker to manage your portfolio then broker will be using his discretion to trade on your account based on your investment objectives and suitability.

If you are a day trader, the risk factor would be high as far as your stock trading strategy is concerned. This is because of the fact that you would not be taking any delivery of securities at the end of the day and simply closing out your position whatever be the price. Short term day trading is not every one’s cup of tea and may require constant monitoring of securities and their prices and strategies to exit even at a loss so as to cut losses. Yu may like to place stop loss orders in the system so that your orders are automatically executed if market moves too much against your expectations. It is better to cut losses the sit on heavy losses which you may fine difficult to bear.

Stock trading offers great opportunities to make money if you have right attitude and sense of investment. People world over have made money by adopting different trading strategy in stock trading. You too can benefit from the same if you learn a few basic lessons of investment and then take a right decision. Stock trading is also a way to learn the way markets operate in real time. Thus you an devote time doing mock trading before full fledged operations. This way, you can anticipate what to expect when you are actually faced with the prospect of doing the trading in stocks and derivatives in the real time environment.

Shares are the number of units to denote the ownership of a company and are generally available for trading o a stock exchange. The continuous moving ticker that you see on your TV or computer screen are the prices at which these shares are available for buy and sale. When you buy shares of a company, you become owners of companies to the extent of face value of shares bought by you. Face value denotes the nominal value of these shares. Thus face value of shares may be dollar but it may be available in the market for trading at a much higher price depending upon its performance or future potential. However if you buy shares, you become entitled only to the extent of face value of shares and all corporate actions such as dividend, bonus, split etc. depends upon that. Thus the company may declare a dividend of 100%. However calculation of the same will be on face value and not the price paid by you to buy the security. In this case, for example, if you are holding 1 share, you will get 1$ by way of dividend.

Investment in shares of a company can be made in different ways. If you want to be initial investor, you can invest in the initial public offerings brought by the company when the company wants to raise finances and list its shares on stock exchanges. Shares may be listed on stock exchanges such as New York Stock Exchange or NASDAQ or other Over the Counter Stock exchanges. Alternatively a number of Alternate Trading Systems (ATS) are also formed by big stock exchanges which allow people to trade in a number of shares of companies.

Once listed on a stock exchanges, shares are available for trading on a stock exchange and you need to go to a stock broker for buying or selling shares. Your broker may also offer on line trading facility or you may simply call the broker to give your orders for execution. Your broker will charge a commission for executing your orders and you will get delivery of shares or proceeds of your sale through such broker.

Investment in shares yields benefits such as dividend and appreciation in capital value of your investment. Dividend is declared by the management depending upon the financial performance of the company and its share price is a factor of demand and supply. Thus a higher demand for shares of a company would push up the market price and vice versa. Again demand and supply are factors dependant upon the past and the expected performance of the company and may push up or push down the share price.

Volatility in share prices may seem to be dampener for a large number of investors. However if you pick up right stocks at the right time, you can make money out of your investment. It is not so simple but not too difficult too provided you are disciplined in your approach.