I took to address this issue when someone asked me what is the right age to invest. When you scroll down you will find for yourself.
Investing is something that is like a toy. You dont have a reason to buy it (ofcourse to play).
Why do people invest? For variety of reasons.
1. To save something for the future
2. Diversify funds
3. Learn market movements
4. Gamble with
But the Noble Investing Formula goes this way
Invest Your Savings> Diversify risks> Set right portion> Reinvest quantum
We can give it the IDSR way of noble investing.
What is investment?
There can’t be a worded answer to this very simple question. It simply means utilizing the present resources and diversifying wealth for future; can be one answer yet it has its infinite meanings through its versatile application in the real practices.
1. The term investment has accrued its cream in this rapid changing world despite the global turnaround. It is the term investment that adds aroma to the active investing herd who total to around 6.5 billion.
2. Investment is generally anticipatory expectation of accumulating wealth via the present resources. Or it can be an asset class that is purchased in closer concern with its income generating ability in the future which can be sold off at a higher price. The mottled fact here is the theory of not using the present resources. Investment cannot be done without Savings.
Basic ways of investing
There are some basic ways to invest your money
a. Depositing it in the bank
b. Lending it to someone at some rate for some period
c. Purchasing stocks from the capital market
d. Buying a property (house, land)
e. Buying gold or silver
f. Investing in Mutual Funds
Warren Buffett’s way:
He is the World’s richest man, and he has made all the money in the stock market. He is one of the world’s greatest investor. His theory is very simple which says before stepping your investments in company first sketch how the company makes money.
Fact File Name: Warren Edward Buffett
Born: August 30, 1930
Lives: Omaha, NE
Education: Univ. of Nebraska, BS, Columbia, MM
Factoid: Rejected from Harvard business school, partly because he was too young. Bet the admissions people are kicking themselves now
Started investment at the age of 11 and regretted for the delay. Mr. Buffet has just 11 employees working for him. And to imagine that most equity research outfits have a battery of analysis working for them. Mr. Buffet’s office does not have a single computer. Buy-sell-hold decisions are made minus computers. This in computer crazy America should be the ultimate joke one would think.
His principles are: Turn off to the stock market, Do not worry about the economy, Buy a business, not a stock, Manage a portfolio of a business
Conclusion: Age doesn’t matter for investment as everything is learnt only when there is a spark to inculcate. Proven with Warren Buffett, the investment Guru.
Showing posts with label Finance. Show all posts
Showing posts with label Finance. Show all posts
Monday, August 24, 2009
Friday, November 14, 2008
Minutes of Risk
Want to know the different types of risk associated with the investing? Scroll on to know what!
Take off: Risk in holding securities is generally associated with possibility that realized returns will be less than the returns that were anticipated. Forces that throw in to variations in return price or dividend constitute elements of risk. Every company has its own risk that varies with different organizations. So, we can find companies with low risks which usually are big established companies, with a good market value for their shares, and companies with a big risk factor or companies that never paid their dividends, that belong to a rickety economic area and their shares are worth less. In other words the option of an adverse end outcome is referred to as the “Risk”. Risk cannot be eliminated perhaps could be minimized. Risk can be explained as the expression of the possibility that the actual income will differ from the expected income.
Types of Risk
Inflation Risk: It is better titled the unexpected risk or the purchasing power risk. There is a certain degree of uncertainty regarding the amount of the goods and services that can be bought at the same price at a future date. Rational investors should include in their estimate the expected return for purchasing-power risk, in the form of an expected annual percentage change in prices. If a cost-of living index begins the year at 100 and ends at 103, we say that
The Inflation rate is 3 percent [(103*100)/100]. If from the second to the third year, the index changes from 103 to 109, the rate is about 5.8 percent [109-103/103]. If annual changes in the consumer price index of other measure of purchasing power have been averaging steadily around 3.5 percent and prices will apparently spurt ahead by 4.5 percent over the next year hence the required rates of return will adjust upward. This process will affect government and corporate bonds as well as common stocks. Market, purchasing-power and interest-rate risk are the principle sources of systematic risk in securities.
Interest Rate Risk: It refers to the effects of changes in the prevailing market rates of interest on the bond values. When the interest rates rise, the bond values fall. Hence there is inverse relationship between the interest rate and bond value.
Liquidity risk: Liquidity generally means the quantum of cash readily available. The risk associated with the sale of fixed income securities that must be made at a price lesser than the fair market value because of the lack of liquidity for a particular issue is called the liquidity risk. Treasury bonds are the perfect example of liquid securities that can be easily changed to cash. On the other hand of the liquidity gamut, a unique expensive home or an automobile may be quite intricate to process cash immediately. By and large the investors prefer higher liquidity to a lesser one. Decrease in security’s liquidity will decrease its price as the requisite yield will be higher.
Reinvestment Risk: The process of second investment for any sake is called the reinvestment. When the market rates fall there is a force to reinvest the cash flows at a lower rate thus reducing the returns of the investors.
Suppose say for example: The market rates falls by 10% and the cash flows received from the fixed income securities is Rs. X. Reinvesting the X amount of cash flow at a lower rate say (10-x) % is the process of reinvestment at a lower rate.
Credit risk: Credit period is generally defined as the time granted by the creditor for the repayment of the dues. The risk of credit worthiness is that the firm may lose its value of credit thus increasing the required return thereby decreasing the security value.
Exchange rate risk: Exchange rate is defined as the rate at which a country’s medium is swapped against the currency of the other country so involved. This risk arises from the uncertainty about the value of the exchange medium that flows to an investor in his home country. Thus a US treasury bill may be considered less risky to a US based investor, the same T-Bill to an Indian investor will be reduced by a depreciation of the US Dollar’s relative to Rupees (INR).
Example the value of an US dollar to an Indian rupee is Rs.40. Say the value of the T-bill amounts to Rs.2500. The risk associated with the exchange rate is the depreciation in the value of the US dollar to its initial market value of the bill.
Financial Risk: Financial risk is associated with the way in which a company finances its activities. We usually gauge financial risk by looking at the capital structure of a firm. The presence of borrowed money of debt in the capital structure creates fixed payment in the form of interest that must be sustained by the firm. Financial risk is avoidable risk to the extent that managements have the freedom to decide to borrow or not to borrow funds. A firm with no debt financing has no financial risk. By engaging in debt financing, the firm changes the characteristic of the earnings stream available to the common-stock holders. Specifically, the reliance on debt financing, called financial leverage, has at three important effects on common-stock holders. Debt financing (1) increases the variability of their returns, (2) affects their expectations concerning their returns, and (3) increases their risk of being ruined.
Take off: Risk in holding securities is generally associated with possibility that realized returns will be less than the returns that were anticipated. Forces that throw in to variations in return price or dividend constitute elements of risk. Every company has its own risk that varies with different organizations. So, we can find companies with low risks which usually are big established companies, with a good market value for their shares, and companies with a big risk factor or companies that never paid their dividends, that belong to a rickety economic area and their shares are worth less. In other words the option of an adverse end outcome is referred to as the “Risk”. Risk cannot be eliminated perhaps could be minimized. Risk can be explained as the expression of the possibility that the actual income will differ from the expected income.
Types of Risk
Inflation Risk: It is better titled the unexpected risk or the purchasing power risk. There is a certain degree of uncertainty regarding the amount of the goods and services that can be bought at the same price at a future date. Rational investors should include in their estimate the expected return for purchasing-power risk, in the form of an expected annual percentage change in prices. If a cost-of living index begins the year at 100 and ends at 103, we say that
The Inflation rate is 3 percent [(103*100)/100]. If from the second to the third year, the index changes from 103 to 109, the rate is about 5.8 percent [109-103/103]. If annual changes in the consumer price index of other measure of purchasing power have been averaging steadily around 3.5 percent and prices will apparently spurt ahead by 4.5 percent over the next year hence the required rates of return will adjust upward. This process will affect government and corporate bonds as well as common stocks. Market, purchasing-power and interest-rate risk are the principle sources of systematic risk in securities.
Interest Rate Risk: It refers to the effects of changes in the prevailing market rates of interest on the bond values. When the interest rates rise, the bond values fall. Hence there is inverse relationship between the interest rate and bond value.
Liquidity risk: Liquidity generally means the quantum of cash readily available. The risk associated with the sale of fixed income securities that must be made at a price lesser than the fair market value because of the lack of liquidity for a particular issue is called the liquidity risk. Treasury bonds are the perfect example of liquid securities that can be easily changed to cash. On the other hand of the liquidity gamut, a unique expensive home or an automobile may be quite intricate to process cash immediately. By and large the investors prefer higher liquidity to a lesser one. Decrease in security’s liquidity will decrease its price as the requisite yield will be higher.
Reinvestment Risk: The process of second investment for any sake is called the reinvestment. When the market rates fall there is a force to reinvest the cash flows at a lower rate thus reducing the returns of the investors.
Suppose say for example: The market rates falls by 10% and the cash flows received from the fixed income securities is Rs. X. Reinvesting the X amount of cash flow at a lower rate say (10-x) % is the process of reinvestment at a lower rate.
Credit risk: Credit period is generally defined as the time granted by the creditor for the repayment of the dues. The risk of credit worthiness is that the firm may lose its value of credit thus increasing the required return thereby decreasing the security value.
Exchange rate risk: Exchange rate is defined as the rate at which a country’s medium is swapped against the currency of the other country so involved. This risk arises from the uncertainty about the value of the exchange medium that flows to an investor in his home country. Thus a US treasury bill may be considered less risky to a US based investor, the same T-Bill to an Indian investor will be reduced by a depreciation of the US Dollar’s relative to Rupees (INR).
Example the value of an US dollar to an Indian rupee is Rs.40. Say the value of the T-bill amounts to Rs.2500. The risk associated with the exchange rate is the depreciation in the value of the US dollar to its initial market value of the bill.
Financial Risk: Financial risk is associated with the way in which a company finances its activities. We usually gauge financial risk by looking at the capital structure of a firm. The presence of borrowed money of debt in the capital structure creates fixed payment in the form of interest that must be sustained by the firm. Financial risk is avoidable risk to the extent that managements have the freedom to decide to borrow or not to borrow funds. A firm with no debt financing has no financial risk. By engaging in debt financing, the firm changes the characteristic of the earnings stream available to the common-stock holders. Specifically, the reliance on debt financing, called financial leverage, has at three important effects on common-stock holders. Debt financing (1) increases the variability of their returns, (2) affects their expectations concerning their returns, and (3) increases their risk of being ruined.
Wednesday, November 12, 2008
Bud-get
get it right!
Does your budget never seem to balance the way it should? Are you constantly digging into the savings to make ends meet? It's time to take a good look at essential components you might be missing or you have not allowed sufficiently for in your household budget plan. Here are some of the most common budget oversights. With the global financial Meltdown racing at a fast speed there is a desperate urge for the young and working oodles to handle their resources with care. A budget is a blue print of the expenses of an individual. Applies to the nation too.
H #1 Failure to Plan for Inevitable Expenses
We often have certain expenses that we term normally unexpected. Is that true? Don't you clandestinely know that these things happen? Have you ever owned a car that did not need repairs or maintenance? If you have, you probably didn't own it long enough. The solution; Start counting on the car breaking down instead of hoping it doesn't! Plan for these expense in your household budget. Get it right. Home maintenance is always a factor in our finances. Even if you rent, you probably have some home related expenses waiting to creep up on you. These are just a couple of examples of variable or irregular expenses that we often overlook in household budget planning.
Property, Auto, Health and Life Insurance - if not paid on a monthly schedule. Even if you do pay monthly, you should try to save for a lump payment if at all possible. Most companies charge up to Rs. 1250 for monthly payment options. I say, it's always best to invest in yourself. Don't you agree? Plan for these expenses in your household budget to save money. Put the Rs.15000 in your savings!
Taxes: If you know you will have to pay hon. Govt., prepare for it. If you value your home or other property investment, prepare for the costs. Don't scramble at the last minute to come up with enough to pay your obligations. If you do, it's likely other areas of your household budget will suffer greatly, since these expenses have a high priority.
Clothing - Now, this has been the choice of the day. You give utter significance to clothes. You need to spend more if you have grown up by your side. Expecting them to stop growing or somehow not care how they look to their peers? Of course not! I use every resource available to me to cut down the clothing budget; I know I must account for this expense in my household budget plan. It arises, when someone is really prepared.
Gifts – This could be the unexpected. If your friends, family, and kids don't care if they don't get gifts from you, if you've declared war on the holidays, or have a convenient hiding place when these occasions take place, then you can skip this one!
Medical - Unless you're lucky enough, or not lucky, to qualify for medical assistance, you undoubtedly have medical expenses over and above the cost of your health insurance; Co-pays for doctors and medicines, over-the-counter medications, dental and eye care expenses. One can’t omit this in his/her budget. Get it right.
H #2 No reserve Fund
It is essential to posses the knowledge about what warrants an emergency. A real emergency might include; loss of income, severe illness, or death in the family. Although we all hope such occurrences never happen to us, sometimes we aren't lucky enough to flight these unfortunate events in life. You should try to set aside a specific amount, no matter how little, each month in an emergency fund to eventually equal at least three to six months of your current income. I know this isn't possible for some people with substantial debt payments. That’s why you need to budget before something could visit. Get it right!
H #3 Luxury
This is simply spending more than you earn. Unfortunately, this is a direct consequence of household tenet #1 and #2. When funds are not set aside for variable expenses and emergencies in your household budget plan, you will inevitably turn to plastic money (credit cards) to bail out. Spending more than you earn is a sure sign that you're headed for a snag. When you spend future earnings its like "counting your chickens before the eggs hatch."
A 5-10% of your income as savings, or add on to existing savings, each month for your emergency fund. Make sure your expenses are within your income.
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