Basics of Financial Marketsby Team Goelji on June 13, 2010
What is Investment?
The money you earn is partly spent and the rest saved for meeting future expenses. Instead of keeping the savings idle you may like to use savings in order to get return on it in the future. This is called Investment.
Why should one invest?
One needs to invest to:
- earn return on your idle resources
- generate a specified sum of money for a specific goal in life
- make a provision for an uncertain future
One of the important reasons why one needs to invest wisely is to meet the cost of Inflation. Inflation is the rate at which the cost of living increases. The cost of living is simply what it costs to buy the goods and services you need to live. Inflation causes money to lose value because it will not buy the same amount of a good or a service in the future as it does now or did in the past. For example, if there was a 6% inflation rate for the next 20 years, a Rs. 100 purchase
today would cost Rs. 321 in 20 years. This is why it is important to consider inflation as a factor in any long-term investment strategy.Remember to look at an investment’s ‘real’ rate of return, which is the return after inflation. The aim of investments should be to provide a return above the inflation rate to ensure that the investment does not
decrease in value. For example, if the annual inflation rate is 6%, then the investment will need to earn more than 6% to ensure it increases in value. If the after-tax return on your investment is less than the inflation rate, then your assets have actually decreased in value; that is, they won’t buy as much today as they did last year.
When to start Investing?
The sooner one starts investing the better. By investing early you allow your investments more time to grow, whereby the concept of compounding (as we shall see later) increases your income, by accumulating the principal and the interest or dividend earned on it, year after year. The three golden rules for all investors are:
- Invest early
- Invest regularly
- Invest for long term and not short term
What care should one take while investing?
Before making any investment, one must ensure to:
1. obtain written documents explaining the investment
2. read and understand such documents
3. verify the legitimacy of the investment
4. find out the costs and benefits associated with the investment
5. assess the risk-return profile of the investment
6. know the liquidity and safety aspects of the investment
7. ascertain if it is appropriate for your specific goals
8. compare these details with other investment opportunities available
9. examine if it fits in with other investments you are considering or you have already made
10. deal only through an authorized intermediary
11. seek all clarifications about the intermediary and the investment
12. explore the options available to you if something were to go wrong, and then, if satisfied, make the investment.
These are called the Twelve Important Steps to Investing.
What is meant by Interest?
When we borrow money, we are expected to pay for using it – this is known as Interest. Interest is an amount charged to the borrower for the privilege of using the lender’s money. Interest is usually calculated as a percentage of the principal balance (the amount of money borrowed). The percentage rate may be fixed for the life of the
loan, or it may be variable, depending on the terms of the loan.
- What factors determine interest rates?
- What are various options available for investment?
- What are various Short-term financial options available for
- What are various Long-term financial options available for
TO KNOW ALL THIS AND MORE ABOUT INVESTING DOWNLOAD AND READ THE FOLLOWING DOCUMENT:-
This is an extract from handbook on basics of Financial Market by National Stock Exchange Of India.
This document has been contributed by Mr. Anand Wadadekar.