Jun 25

Shares are Riskier??

Personal Finance No Comments »

Most of them feel that Shares are Riskier. They convinced me also that it is most riskier than any other financial instruments. Till I traded, I was also under the same impression. After trading I have realized that Shares are not that riskier as people told me.

Shares are just another financial instrument which people use to increase their income. It is the trader who makes the shares riskier and shares itself is not that risky. Generally a trader takes daredevil risks where as an investor takes calculated risks.

People are very confused in share market (I was one of them!!). They don’t know whether to be a Trader or Investor. If they want to be a Trader they are not sure how to trade, when to trade, how to trade and so on… If they want to be a Investor they are not sure how long to invest, in what they should invest, when to take out money and all that.. Its a scary confused world of people who don’t know what to do with their money and lose out. There are other bunch of people who know exactly what to do and they make money. It is up to you to choose which side you want to stand.

Before even dreaming of making money in stock market. Decide your position. Whether you want to be a trader or investor and after that decide on how much you want to make and when you plan to quit the stock market. If you are greedy I am sure you will lose. Don’t be greedy, decide the things and then start your game.

Stock market is a game, first learn the rules and then decide your game play and then play the game..

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Jun 23

What is a Bank? How does it function?

Personal Finance 1 Comment »

Bank functions on the trust and belief that the customers have on them. (Not many knew this, were you one of them?? I was!!!).

All that we do is we deposit our hard earned money in bank trusting them that they will respect our cheques and will return us our money when we want. We have a sense of security with the banks that the money is safe with them rather than with us. This is not the only reason for keeping the money with the banks. They provide us the opportunity to access the money at our ease (ATM) and also they provide many facilities. But the most important thing is Banks provide us Interest for the amount that we have deposited. Banks do provide the convenience for us to do loads of things with the money which we would not be able to do if we had kept the money with ourselves without trusting the banks.

From webster’s dictionary, Bank means “an establishment for the custody, loan, exchange, or issue of money, for the extension of credit, and for facilitating the transmission of funds”. The main purpose of Bank is to loan out the money to public in order to facilitate their spendings. When money is deposited by an individual that money goes to a pool of money where others also have deposited and the account of the individual is credited with the money so that when he gives the cheque it will be honored or he can withdraw money whenever he needs it. Interest will be provided to the amount that the individual has deposited.

What Bank does is, for every Rs.100 it has got through deposits it can lend Rs.90 and it should keep Rs.10 as reserve. This reserve amount is decided by the Central bank of the nation i.e. RBI for India. RBI governs all the banks in India. Banks provide lesser interest to the amount deposited than the interest it charges for the loan. The interest that is provided to the amount deposited varies depending on the type of account and how long the money is with the bank. Generally for savings account it is around 7 – 9% depending on the tenure and the various loans that it provides customer are Home loans, education loans, vehicle loans and so on. The interest for each of this also varies. Since the bank has Rs.100 has deposits, RBI also gives money to Banks and charges them interest. Generally it is up to 9 times the bank gets money from RBI. So RBI gives bank Rs.900 if the bank has Rs. 100 and all that bank has to do is just keep Rs.10 as reserve and lend out Rs.990. Bank loans the money out to general public and gets it back and returns the money back to RBI making some profits.

How does Bank make money? Banks are also a type of business. They make money on the interest they charge on loans because that interest is higher than the interest they pay on depositor’s accounts. The interest rate a bank charges its borrowers depends on both the number of people who want to borrow and the amount of money the bank has available to lend. Loaning money is also inherently risky. A bank never really knows if it’ll get that money back. Therefore, the riskier the loan the higher the interest rate the bank charges. While paying interest may not seem to be a great financial move in some respects, it really is a small price to pay for using someone else’s money.

Bottom line is : Banks just work on TRUST and nothing else. RBI and Depositor’s trust bank and provide their money. Bank in turn trusts its customers and expects them to pay back the amount that it has lent. If someone defaults in the middle the whole setup goes for a mess. If someone has a account in the bank that means he is trust worthy.

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Jun 21

Taxes

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Many would be eager not to pay taxes to the government and save up. It is a good thought to do so but have you ever thought in these lines?

1. Why does government always give tax break when we are in debt and that too long term debt such as home loans and why not for personal loans?
2. Why does government give tax break for investing in mutual funds and not for shares?
3. Why does government give tax break for Insurance?
4. Why is tax deducted at source (for Salaried People)?
and ….

These are some of the questions that keep ringing me.. I don’t have any answers for these but all that I can understand is, the taxes are made by the Rich people to ensure that middle class people pay the taxes and they can manage to save up the taxes legally. Government ensures that they try to take out every penny from the people in order to provide facilities to the people. I don’t know how far this is true but the intension is this only.

What is meant by Tax Deducted at source?
That means Before you lay your hands on your hard earned money, government takes its share and provides you the left over. :)
Salaried class always gets the Tax Deducted at Source, in short TDS. Whereas the Business class always enjoys the money and at the year end pay the Tax to the government. Honestly Business class is a best way to earn and save up rather than the Salaried class.

Consider this situation: I am a Salaried employee and I need to organise a party for my friends. I need to do that with after tax money (Government takes its share). If I am a Business man and I want to throw a party then I would do that with the money which is not taxed and later I would write it off as a Business meeting expenditure. There are various options for Business man to avoid tax where as the Salaried class is not so blessed.

I can sense many loop holes for a business man. This draws me to a conclusion that Tax rules are made by the Rich and they have made sure to pay less and in turn burden the salaried class.

Many of us are bothered about taxes and we try to minimize the taxes as much as possible. I want to make few things clear.

1. Don’t invest your hard earned money to reduce your taxes.
2. Investment and Taxes should be two different things.
3. Make sure that you learn the basic tax rules that are required.
4. There are lot of loop-holes in the Taxes provided by the government for the good reasons, try to use them and ensure you don’t pay more in taxes.

There are various components in our pay slip such as Basic, H.R.A, and so on. Try learning what each one means and how it is taxed and learn means to minimize the tax as much as possible.

Just for an example:
For H.R.A:
If you are living in your own house and still you want compensation for House Rent Allowance then this is what you should do.

Pay your Parents or Grand Parents an amount every month as Rent. This is not illegal. By this way you will get your tax benefit and also if your parent’s income is less even they wont be taxed. To be on the safer side you pay the rent to a non-working parent in your family.

There are various loop-holes that is present. I don’t know many. I shall update you guys whenever I get these kind of information.

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Jun 18

Recurring Deposit

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Let us discuss about Recurring deposit.

Recurring deposit schemes pay you a higher interest rate than the Savings account. Generally it will be higher by at least 2% or so. I have not enquired about the interest rates in every bank but I am sure it will be higher than 8%. You must be wondering why Recurring account interest rates must be higher than Savings account. This is due to the fact that Recurring account demands you to deposit the amount you agreed every month till the time you have agreed upon and you can’t withdraw the amount till the agreed time period ends. If you defer paying then fine will be charged. Generally it is the bank that decides the minimum amount that is required to be paid and mostly time period is minimum one year. There are several banks that provide this facility.

I don’t advise married people to go in for this because financial commitments might crop up every now and then and it is very hard to be attached to it. We can’t have a very strict regime, we prefer to have some relaxations but if you are single then this is the best way to start your savings habit. It forces you to pay and make sure that it is ECS (Electronic Clearing Scheme) and it should be deducted on the day of your salary (for safer side).

You start this way and I am sure by the end of the year you will thank me for doing it.

Hope you plan up your financial future.

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Jun 16

Investment

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From today onwards I will blog about Investments. I have been investing for more than 2 years now. I will write more about my mistakes I did so that you don’t repeat the same mistakes.

Let me start the introduction:

What is an Investment?
Investment is related to saving for future or deferring the spending. My understanding is, we buy some asset in hope that we will get positive returns from that asset without us working hard. That asset can be anything like shares, real-estate, finance, business, buying precious metals, commodities and so on.

Usually for technical terms related to investments I prefer google.com and investopedia.com. They help you than anyone else.

What is meant by share?

When a Privately/Individually owned Company goes public then the company is split into finite number of financially equal units called Share.

Shares provide you a unit of ownership in that company. Owning a share does not mean you have control over the day to day activities in the company but you will also be given a chance to make vital decisions in the company proceedings.

A person having a share is called Shareholder. Some companies provide voting option for the shareholders i.e., they can vote while taking a decision along with the board and then depending on the votes the decision will be taken. Consider that, XYZ corp wants to buy AAA corp and every shareholder is given the voting authority. Then to decide whether to buy or not, A voting is held. Depending on the result the company decides to buy. Most of the companies provide this voting authority to its shareholders.

Shareholders does entitle the possessor to an equal distribution in any profits, if any are declared in the form of dividends.

There are loads to know about shares and other financial instruments. I am not getting into depth of all those as it is not necessary for us. All that I will cover is how to get into stock market and that is my intension, before that I feel we should know certain things and I am doing that.

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