Your Better Guide To Money Growth

Tuesday, October 23, 2012

VALUE INVESTING

Among the various types of investing methods let us first see value Investing. First of all what is value Investing.? Simply saying buying the Stocks at very low price and selling at Considerable higher price is called value Investing.

In another words Stocks purchased at lower than the ( Intrinsic value ) Real value. If the market value is very lower than the Intrinsic value , the chances of stock prices further more lowering are less. Let us see with an example,

For example if Onion is cultivated in your own Garden then the actual cost price is Rs.10 / Kg. During season times we can get the same onion for Rs.6 / Kg. So apart from production rate Rs.4 / - is the gain per / Kg. If we are able to get onion at a cheaper cost, less than the real value, then

1. In houses we can purchase required for 1 to 3 months.
2. In hotels for Ambulate, Onion dosa etc…..

For example if you have planned to open a Xerox, with cell phone sales and some Stationery items, shop at a cost of Rs. 2 /- Lakhs. Supposing the same kind of shop with complete required facilities what you expect, is available in Rs. 1.5 /- lakhs. What you may do ? You may definitely purchase the shop ! It is called value investing.

Even stocks, at some times may be available less than the real value. How to pick at those stocks ? For value stocks P / E, P / BV, and several other factors will be low. Dividend yield will be more. In those companies the growth speed , will be low. Like a Tortoise more as slow and steady. Rapid growth expecting investors don’t like these type of stocks.

This pattern of investing was said to the world by Benjamin Graham and David Dodd, the two experts who worked as Professors in Columbia business school, America in the starting of 20th century. Later they wrote a book “Security Analysis” in 1934, a most popular book of the stock market.

At present age, value investor is Warren Buffet, the disciple of Benjamin Graham. John Templeton, Joel Greenblatt, also were best in value investing. The book of value investing named “The Intelligent Investor” written by Benjamin Graham attained world fame.

In English “Intrinsic value” a term will be used. It means a products real value. From our above example the real value of onion is Rs.10/-Kg. But we are able to get at Rs.6/-Kg from the market. i.e. at a discount of 40 % lesser than its real value. If purchased lower than the real value, chances for further reduction, are very less or sometimes Nil.

Not that alone, value companies
1. Income
2. Expenses
3. Gain or Profits will be steady.

In future growth prospects can be calculated easily. Since the activities being steady, investment risk is very low. But generally rapid growth expecting companies future cannot be predicted, moreover the risk will be high.

How to find out the value stocks ?

The first point to be noted is any stock must not be purchased at more value. Generally in each period a sector / economy will flourish. During that time that sector / economy stocks price will be rising to its peak. Value investors not even face that direction. Moreover they won’t buy any stock. They start selling.

When the market is at its peak, they won’t buy any stock. In turn, they start selling their stocks. When the entire market being down, value investors tongue may get wet like the waterhole. They wont stop and try to swallow. Stocks bought will be more. Value factors ( such as P/E, P/BV, Dividend etc…. ) whether, are being attractive will be investigated ! What is the margin of safety will be calculated. ( In the above onion example Rs.4/- ( 10 – 6 ) ) Companies cash flow, how stable they are would be monitored. Those companies selling products have overall brand value, when compared to opponents, strength, monetary strength, several things would be analyzed.

Value investing if told shortly, as explained in the book “ The Intelligent Investor”, stocks may not be purchased like perfumes ( scents) instead they can be purchased as provision items. Our people are experts in buying provision items, but they are not applying in buying stocks.

The characters required for value investing :-
1. Patience.
2. Self control.
3. Ordinary intelligence.
4. Investment discipline.

In executing any actions, in the beginning itself, nobody can make a success. Stock investing also not left apart from this. The investors, I have heard playing irrationally following no specific rules and in the end murmur as “Gambling’. Further they also lament as Luck was not bestowed to them, and never enter the direction of stock market. In spite of this, the mistakes committed previously can be recalled, ascertained and a new investment strategy can be handled, and a successful investment experience, can be attempted. In today’s period the Giants of the stock market also, faced many tremendous losses and finally reached the throne. Failures made them success, but not flaggy.

Value stocks are stocks that are priced lower than the value of the company and its assets. You can identify a value stock by analyzing the company’s fundamentals and looking at some key financial ratios, such as the price-to-earnings ratio. If the stock’s price is lower than the company’s fundamentals indicate it should be (in other words, it’s undervalued), then it’s a good buy — a bargain — and the stock is considered a great value.

Monday, October 22, 2012

DIVIDEND

More gain yielding stocks doesn't provide dividend. More dividend giving stocks doesn't
yield high gain. But at the same time much more gain and dividend giving stocks are also present.

Investing in Highest dividend yielding stocks with Long term pattern may reduce the risk taken considerably. Those stock prices rising and lowering need not be bothered by us. Reason for our investment , like Interest, Dividend may be continuously obtained.

What is Dividend ?

An Organization sharing a part of gain, profits (yielding) with shareholders is called
“ DIVIDEND ”. A dividend payment made in the form of additional shares, rather than a cash payout.

Companies may decide to distribute stock to shareholders of record if the company's availability of liquid cash is in short supply. These distributions are generally acknowledged in the form of fractions paid per existing share.

An example would be a company issuing a stock dividend of 0.05 shares for each single share held. A taxable payment declared by a company's board of directors and given to its shareholders out of the company's current or retained earnings, usually quarterly.

Dividends are usually given as cash (cash dividend), but they can also take the form of stock (stock dividend) or other property. Dividends provide an incentive to own stock in stable companies even if they are not experiencing much growth.

Companies are not required to pay dividends. The companies that offer dividends are most often companies that have progressed beyond the growth phase, and no longer benefit sufficiently by reinvesting their profits, so they usually choose to pay them out to their shareholders also called payout.

How do corporations pay out their excess cash ( excess capital ) to stockholders?

1. Dividends
2. Share Repurchases

Dividend changes are typically viewed as a stronger management signal about future cash flow (since firms are very reluctant to reduce dividends). However, each method of distributing cash results in cash being paid out. The value of a firm’s common stock should always be the Present Value of all the future FCFEs that are expected to be paid out to the stockholders how the cash is paid out should be irrelevant.

Why dividend is given ?

A Tree planted, watered, fertilized and grown for what purpose? To get good fruits, and enjoy the Breeze, shade. Likewise the same story is happening here also.

One of the simplest ways for companies to communicate financial well-being and shareholder value is to say "the dividend check is in the mail." Dividends, those cash distributions that many companies pay out regularly to shareholders from earnings, send a clear, powerful message about future prospects and performance.

A company's willingness and ability to pay steady dividends over time - and its power to increase them - provide good clues about its fundamentals.

Dividends Signal Fundamentals

Before corporations were required by law to disclose financial information in the 1930s, a company's ability to pay dividends was one of the few signs of its financial health.

Despite the Securities and Exchange Act of 1934 and the increased transparency it brought to the industry, dividends still remain a worthwhile yardstick of a company's prospects.

Typically, mature, profitable companies pay dividends. However, companies that do not pay dividends are not necessarily without profits.

If a company thinks that its own growth opportunities are better than investment opportunities available to shareholders elsewhere, the company should keep the profits and reinvest them into the business.

For these reasons, few " growth " companies pay dividends. But even mature companies, while much of their profits may be distributed as dividends, still need to retain enough cash to fund business activity and handle contingencies.

The progression of Microsoft through its life cycle demonstrates the relationship between dividends and growth. When Bill Gates' brainchild was a high-flying growth company, it paid no dividends, but reinvested all earnings to fuel further growth.

Eventually, this 800-pound software "gorilla" reached a point where it could no longer grow at the unprecedented rate it had maintained for so long. So, instead of rewarding shareholders through capital appreciation, the company began to use dividends and share buybacks as a way of keeping investors interested.

The plan was announced in July 2004, nearly 18 years after the company's I.P.O. The cash distribution plan put nearly $75 billion worth of value into the pockets of investors through a new 8 cent quarterly dividend, a special $3 one-time dividend, and a $30 billion share buyback program spanning four years. In 2010, the company is still paying dividends of 1.8%

Characteristics :-

Income, gain, Yearly ! For many people this is the main criteria of hopefulness for Investment. Nothing surprise in this fact. Any organizations stock prices rising , lowering and the performance of next year can’t be predefined. But the gains acquired , being shared with shareholders cannot be said like that. It can be presumed.

An Organization’s aim is to run profitably to ( for ) the Owners ( Promoters) , that aim’s identity can be said as dividing the gain in the form of Dividend to the share holders. A part of this gain is required for Re-Investment. Balance amount alone can be given as Dividend.

Best four characteristics of Good stock !

Dividend provide investors with a return on investment even when markets are down. As a result investors get paid to hold their stocks through thick and thin. It is important however to pick a stock selection strategy that fits with your financial goals. A good entry strategy is just the beginning however. Investors should also be following the strategy at all times in order to be successful.

Four important characteristics of successful dividend portfolios include

a) Entry and exit criteria,
b) Diversification,
c) Dollar cost averaging and
d) Selective dividend reinvestment.

a) Entry / Exit Criteria

Under my current entry criteria I am looking for companies which have consistently boosted annual distributions for at least one decade. The next step is screening whether the dividend is adequately covered, and that the dividend payout ratio does not exceed 50%.

The only exception to this rule is for certain special investment vehicles such as Master Limited Partnerships, Real Estate Investment Trusts or Utilities, where I look at the trend of the dividend payout ratio.

I also check to see whether there is earnings growth over the past decade and whether the company has any sustainable competitive advantage. Once the company yields more than 2.50%, has a price earnings ratio of less than 20 and has a dividend payout ratio of less than 50%, I initiate my position in the stock.

I would hold on to the stock as long as dividend payments keep getting increased regularly and would add to the position on dips. An example of an attractively valued dividend stock is Johnson & Johnson (JNJ).

I would only consider selling if the dividend is cut for whatever reason. If the company stops raising the dividend I hold onto the stock, but I stop contributing new money.

Currently the three stocks I have stopped contributing new money include M&T Bank (MTB), British Petroleum PLC (BP) and National Retail Properties (NNN). The three companies have failed to raise distributions for more than 4 consecutive quarters, which makes them a hold.

An example of stocks I sold due to a dividend cut include American Capital (ACAS), which was sold in 2008 when it announced that it would no longer pay a quarterly distribution.

b) Diversification

Traditional dividend stocks included high yielding utility stocks and financials. Most financial stocks cut or completely eliminated dividends over the past two years. If investors should learn one lesson from the financial crisis of 2007 -2009, it should be to diversify your portfolio, in order to generate sustainable dividend income.

Canadian Income Trust investors also learned a similar lesson in 2006, after the government decided to phase out the royalty trust corporate structure in 2011, sending stock prices and distributions per unit nose-diving.

It is also important to own more than 30 stocks from as many sectors as possible, in order to prevent an unfortunate downturn in one sector or a few stocks from destroying your chances of generating sustainable dividend income.

Owning more than 30 stocks makes your dividend portfolio less exposed to individual company risks, although you will still be exposed to overall market risk.

c) Dollar Cost Averaging

After selecting the stocks to include in your portfolio, it is important to spread your purchases as a precaution to avoid paying too high prices. Few if any investors could time successfully the exact highs and lows in the stock market, which is why having a consistent strategy of making prudent purchases every so often would be a good idea.

Even high quality dividend stocks such as Procter & Gamble (PG) are not immune from market fluctuations. Dollar cost averaging would have been very beneficial to investors in 2007 and 2008, although a lump sum investment in 2009 would have been better.

d) Selective Dividend reinvestment

Dividends could be either sitting there or get reinvested. The beauty of dividends is that it is under the discretion of the individual investor to purchase more stock, buy equity in a different company / investment or spend it another way.

I do re-invest only a portion of my stocks directly; most other times however I let my dividends accumulate and I either re-invest in the same stocks or in new stocks that have been on my watch list.

Dividends

The Board of Directors must authorize all dividends. A dividend may distribute cash, assets, or the corporation's own stock to its stockholders. Distribution of assets, also called property dividends, will not be discussed here.

Before authorizing a dividend, a company must have sufficient retained earnings and cash (cash dividend) or sufficient authorized stock (stock dividend). Three dates are relevant when accounting for dividends:
# Date of declaration.
# Date of record.
# Date of payment or distribution.

The date of declaration is the date the Board of Directors formally authorizes for the payment of a cash dividend or issuance of shares of stock. This date establishes the liability of the company. On this date, the value of the dividend to be paid or distributed is deducted from retained earnings.

The date of record does not require a formal accounting entry. It establishes who will receive the dividend.

The date of payment or distribution is when the dividend is given to the stockholders of record.

If a company has both preferred and common stockholders, the preferred stockholders receive a preference if any dividend is declared. Having the preference does not guarantee preferred stockholders a dividend, it just puts them first in line if a dividend is paid.

Preferred stock usually specifies a dividend percentage or a flat dollar amount. For example, preferred stock with a $100 par value has a 5% or $5 dividend rate. Five percent is the $5 dividend divided by the $100 par value. This means all preferred stockholders will receive a $5 per share dividend before any dividend is paid to common stockholders. Some shares of preferred stock have special dividend features such as cumulative dividend or participating dividend.

A cumulative dividend means if dividends are declared, preferred stockholders will receive their current-year dividend plus any dividends not paid in prior years before the common stockholders receive a dividend.

Owning a share of preferred stock that includes a cumulative dividend still does not guarantee the preferred stockholder a dividend because the company is not liable to pay dividends until they are declared.

Having cumulative preferred stock simply reinforces the preference preferred stockholders receive when a dividend is declared. If a company has issued cumulative preferred stock and does not declare a dividend, the company has dividends in arrears. Although not a liability, the amount of any dividends in arrears must be disclosed in the financial statements.

The participating dividend feature provides the opportunity for the preferred stockholders to receive dividends above the stated rate. It occurs only after the common stockholders have received the same rate of return on their shares as the preferred stockholders.

For example, say the preferred dividend rate is 5% and the preferred stock has a participating feature. This means that the preferred stockholders will receive a larger dividend if the authorized dividend exceeds the total of the 5% dividend for the preferred stockholder and a 5% dividend to the common stockholders.

Who decides the Dividend distribution to the share holders ?

The Board of Directors formed by the Owners, promoters, recommend a dividend value, affordable by the Promoters Vs Organization. Also Top level Officials thinking will be kept in mind while recommending.

When a publicly traded company achieves profitability, it can decide to use those earnings to reward shareholders with a cash dividend. If a cash dividend does not make fiscal sense, however, the company may instead choose to issue stock dividends to investors.

Board Approval

Before a company can reward investors with any dividend distributions, either cash or stock, the decision must be approved by the board of directors. If the board decides a stock distribution which is in the best interest of shareholders and the company, it will vote to approve the suggested payout or an amount it considers appropriate.

Declaration Date

Stock dividend payments are typically announced on a quarterly basis, in sync with when a company files its earnings report with a regulatory body in a region.
This is known as the declaration date, and it is followed by a series of other dates that determine which shareholders are eligible for the distribution.

Number of Shares Increases

When a company issues a dividend distribution, it grants investors additional shares, but it also increases additional shares in the stock market.
This means that the amount of stock held by investors becomes diluted as the share price drops because there is a greater number of shares outstanding.

When Dividend ?

Dividend distribution if approved, then the next question is when it can be given. In each Organization to register and to maintain the stock records a person named “REGISTRAR” will be found. In his records on a particular day, the owners of all the stock holders, obtained are only eligible for Dividend. That date can be called as Registration date (or ) Record date.

Supposing if we are buying stocks on record date, can we get Dividend. Certainly no. Stocks purchased from a Owner, must be informed to the Registrar. After 1 or 2 days his registration will be renewed. So before registration date ( say 1 or 2 days ) Ex-Date will be decided. This decision will be taken by Stock market and not the said Organization.

Stocks purchased before Ex-Date, that business will be recorded before record date. Stocks purchased after Ex-Date dividend may not be available. So that the Business before Ex-date can be called as cum Dividend and after Ex-Date can be called as Ex-Dividend.

The above Record date, Ex-date, matters for dividend signifies others also such as Bonus, Split, Rights shares ( rights ) and all types of Benefits.

Let us imagine 2 Companies A and B
Company stock price Dividend Yield
A Rs.100 5
B Rs.100 1

Dividend yield of those 2 companies A and B are 5 and 1 %. After 5 years let us consider the stock prices of A as 100 and B as 1500. The same 5 and 1 % dividend is given. Now Rs.5 /- for A and for company B Rs.15 /- will be obtained as Dividend.

If merely watching the percentage of dividend yield, we would have lost the entire benefits and also the joy of stock price hike in investment.

INTEREST

In old Indian films we can see a scene, a poor brave guy would borrow money from a Jamindar, living in a village, unable to return the money. To clear the balance the Jamindar, would intend to acquire his tiny land being mortgaged. Finally the poor guy would protest against him conjointly with the help of others for justice, and marry his daughter itself.

Similarly, in all common people’s minds a question may be arising several times during their lifetime like the present Cell phones.

Who has invented Interest ?
"Neither a borrower nor a lender be."
Everybody borrows and lends all the time.
# Children put their pocket money into a bank account to save up to buy a bicycle.
# Students take out loans to finance their studies.
# Credit cards are widely used for short-term borrowing.
# Young couples buy houses on mortgages of 20 to 30 years, and save for their retirement.
Understanding lending and borrowing means understanding compound interest.

Early Loans And Interest Were Based On Agricultural Produce

From about 30,000 BC human existence became more refined until social and economic forms of agriculture appeared around 10,000 to 7,500 BC. This took the form of hoe gardening done mainly by women and led to matriarchal based societies.

From around 6,000 BC the horse was tamed and sheep, goats and cattle were domesticated so that by 5,000 there existed a mixed culture based on animal breeding and hoe gardening. The great plough revolution starting about 4,500 was complete by 4,000 BC. enabling the first city civilizations to arise, and the introduction of writing shortly after, led to a developing “social technology.”

Loans in the pre-urban societies were made in seed grains, animals and tools to farmers. Since one grain of seed could generate a plant with over 100 new grain seeds, after the harvest farmers could easily repay the grain with “interest” in grain.Also since just so much seed grain could possibly be used, there were natural limits to this lending activity.

When animals were loaned interest was paid by sharing in any new animals born.The Sumerians used the same word – mas – for both calves and interest. A similar Egyptian word meant to “give birth.” What was loaned had the power of generation, and interest was a sharing of the result. Interest on tool loans would be paid in the produce which the tools had helped to create.

Value of Time Vs Money !

America’s trading center is New York City. The heart of New York is Manhattan which was bought for $24 in beads in 1626 by Europeans from the native people of Red Indians . Sounds like a ripoff, doesn't it? Manhattan must be worth more than $24, right?

Well, how much would that $24 be worth today, if it had been invested, rather than spent?
Let’s see, 1626 was 383 years ago. I don’t know what the various stock markets were returning at that time, but the average annual return during the 1900's in the United States was north of 10%. Let’s just call it 10%.

So, before you read on, formulate a guess in your head. How much would $24 grow to in 383 years, assuming a 10% annual return?

The image below is just a filler to help stop you from reading ahead — don’t move on until you have a guess.

The answer is $171 quadrillion, which is the same as $171,000 trillion. If you want to be more specific, the answer is $171,241,749,947,654,000 (this answer is probably not accurate as excel can’t really calculate accurately with that many digits). How big a trillion is, so imagine a number 171,000 times that size.

Obviously most people, except my friend Jaisankar who claims to be immortal, don’t have a 383 year investing horizon. But, this example shows how a little bit of money, over a long time frame, can add up to a lot of money. Maybe setting aside $50 a month for your kids’ education or your retirement is a good idea after all!

Nature of Interest !

Interest is a fee paid by a borrower or compensation to the lender, for
a) risk of principal loss, called credit risk; and
b) forgoing other investments that could have been made with the loaned asset, for the privilege of using borrowed money or either assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds. If you borrow money, it comes at a cost. That cost is interest.

These forgone investments are known as the opportunity cost. Instead of the lender using the assets directly, they are advanced to the borrower. The borrower then enjoys the benefit of using the assets ahead of the effort required to pay for them, while the lender enjoys the benefit of the fee paid by the borrower for the privilege. In economics, interest is considered the price of credit.

When money is borrowed, interest is typically paid to the lender as a percentage of the principal, the amount owed to the lender. The percentage of the principal that is paid as a fee over a certain period of time (typically one month or year) is called the interest rate.

Interest is often compounded, which means that interest is earned on prior interest in addition to the principal. The total amount of debt grows exponentially, most notably when compounded at infinitesimally small intervals, and its mathematical study led to the discovery of the number. However, in practice, interest is most often calculated on a daily, monthly, or yearly basis, and its impact is influenced greatly by its compounding rate.

A bank deposit will earn interest because the bank is paying for the use of the deposited funds. Assets that are sometimes lent with interest include money, shares, consumer goods through hire purchase, major assets such as aircraft, and even entire factories in finance lease arrangements. The interest is calculated upon the value of the assets in the same manner as upon money.

When you take a loan out from a bank, or wherever, they will expect you to pay interest. This means that you pay back what you took out on a loan, plus extra money. So for example, if you took a loan out for $500, and let's say you have to pay it back with 15% interest, you would pay back $575.

“Banks are in the business of giving you access to money before you have obtained it. So, a student can borrow money to pay for an education even though they have not worked to obtain the means by which to pay for this education. The business of giving someone money now with the expectation that they will give it back to you at a later date involves enormous and various risks for the creditor. So they charge you an interest rate on this money. Money is a social construct that must be earned (in most cases though not all public purposes). If you have not earned it then you must essentially rent it. And for renting it, you pay a fee….

Until the 16th Century, Western Civilization prohibited the practice of charging interest on money on both moral and legal grounds. In our modern monetary system, however, money is created by banks through loans issued with interest. Though the full implications of the loans that create our money are seldom understood, their effects upon society are pervasive and powerful. Three consequences of interest as a built-in feature of our monetary system are that
(1) it encourages systematic competition among the participants in the system;
(2) it continually fuels the need for endless economic growth; and
(3) it concentrates wealth by transferring money from the vast majority to a small minority.

According to legend, Albert Einstein once called compound interest the 8th Wonder of the World and the “most powerful invention in human history”. There is some debate about the veracity of this quote, but there remains some evidence to suggest the sentiment, if not the exact words.

Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn't , pays it… Albert Einstein

Something else I didn't get taught anything about in school was something that the great Albert Einstein called ‘The eighth wonder of the world‘…

I think I’d have been much more excited about saving my pocket money if I’d been told how it could grow for me when compounded over time, and how, if I’d started saving just 10% of my income from the time I started working (as recommended in The Richest Man in Babylon – available free here) I’d quite likely be living an even more comfortable life now

When some Old persons while talking to children in these days usually mention compound interest, and they often tell the story of ‘a penny doubled‘. It’s an old one, but it always shocks the kids when they hear the end of the story, and how much the penny doubled grows when compounded over time.

Here it is in brief so you can tell it to your children and explain what can happen if they stop thinking about instant gratification and be patient for a while….

Ask them what they would prefer to receive… $1,000,000 today… or one penny today, and have that penny doubled every day for the next month. Most kids will opt for the $1,000,000 today…. but when you show them what will happen if they are prepared to wait, they will be amazed and hopefully it will help them to ‘get’ the power of compounding…

Day 1: $.01
Day 2: $.02
Day 3: $.04
Day 4: $.08
Day 5: $.16
Day 6: $.32
Day 7: $.64
Day 8: $1.28
Day 9: $2.56
Day 10: $5.12
Day 11: $10.24
Day 12: $20.48
Day 13: $40.96
Day 14: $81.92
Day 15: $163.84
Day 16: $327.68
Day 17: $655.36
Day 18: $1,310.72
Day 19: $2,621.44
Day 20: $5,242.88
Day 21: $10,485.76
Day 22: $20,971.52
Day 23: $41,943.04
Day 24: $83,886.08
Day 25: $167,772.16
Day 26: $335,544.32
Day 27: $671,088.64
Day 28: $1,342,177.28
Day 29: $2,684,354.56
Day 30: $5,368,709.12

Half way through the month those who chose the penny are still way behind on $163, but by the end of the month the power of compounding has taken over and they are way in front. As with most things in life the 80/20 rule comes into play, in this case 80% of your money is earned in the last 20% of the time.

And you may even get luckier and have a 31 day month!
Albert Einstein called compound interest "the greatest invention of all time." It has even been referred to as the "Eighth Wonder of the World." The trick is to get this tremendous force working for you rather than against you.

Is compound interest gobbling up a significant chunk of your earnings? If you maintain an ongoing balance with a credit card company, compound interest is costing you much more than you probably realize.

Let's start with basic interest, which is a fee that you pay to a lender for the privilege of borrowing his money. This interest is attached to the original amount at an agreed upon rate. Compound interest is calculated on the balance owing plus any previous interest charges. So then you find yourself paying interest on the interest. This compounding effect continues until it virtually takes on a life of its own. Credit card lenders make a killing putting this principle to work for them. Allow me to illustrate.

Let's say you're carrying a balance of $1,000 on a credit card with a 15% APR. If you pay only the minimum each month, you could conceivably gnaw away at this debt for over 25 years and end up repaying a total of over $3,400! If, on the other hand, you could commit yourself to paying $100 per month, this debt would be wiped out in less than a single year and the interest would come to a much less offensive $75.

Now let's look at what would happen if you took $1,000 and put it to work for you instead of against you. Let's assume that you are able to keep your hands off this money and simply let it sit and earn 6% interest compounded annually. After 12 years, your money would have doubled without you adding one extra penny!

You can quickly figure out in your head how long it will take for a sum of money to double by applying the "Rule of 72." You simply take whatever interest rate you're earning (6% in this case) and divide it into 72. The result will be the number of years required to double your money. (72/6 = 12 in our example)

You can apply the rule backwards as well. Let's say you have a lump sum of $5,000 that you would like to grow into $10,000 in 8 years. You would need to find an investment that pays 9% compound interest. (72/8 = 9). If the best you can find is an 8% return on your money (hypothetically speaking,) then it would take you 9 years to double your money. Not bad for just letting it sit there!

Now let's assume that you want to help the growth rate along, so you add an extra hundred dollars to this account just once a year. At the end of the 12 years, you would now have $3,800. If you could discipline yourself enough to add $200 a year, then you would find yourself with almost $5600.

Seeing your money grow like this might well entice you to invest more money each month and really reap the benefits of this wealth-generating principle. And there's more good news. These examples demonstrate what happens when your investment compounds annually. Some institutions are more generous, compounding your interest quarterly, monthly or even daily.

It's pretty clear which end of the compound interest principle you want to be on. The first step toward the winners' circle is to pay off your existing debts. Even if you're already having trouble making ends meet, a mere $1 addition to a minimum payment can significantly shorten the life of that loan. That's right, just one dollar. You won't miss it and it would be well worth it.

Remember the compounding effect. And once you're out of debt, there's no minimum for earning compound interest. Any sum that you can set aside will do. You don't need to be Donald Trump or Bill Gates in order to benefit from compound interest. It can work wonders for us all.

When you have a sum of money, many people are tempted to simply stick it under the mattress or put it in their piggy banks until they need it. While this is a natural inclination, you may be missing out on a lot of money that you could have in the future. With the power of compound interest, you’ll be able to grow your savings substantially.

Why is interest so important?

When you have a sum of money and you can decide what to do with it, there are plenty of different types of accounts that you could open. You could put your money into a regular savings account, checking account, a mutual fund or into an investment account. With a mutual fund or investment account, there is some risk associated with your money.

For example, you could put your money into a traditional mutual fund, an exchange-traded fund, or even into a regular stock. All of these investments can earn substantial returns, but they can also cause you to lose money. Putting money into any of these types of investments is a gamble and there’s no way for anyone to know what could happen with them.

You could lose everything with this type of account. With a regular savings or checking account, you may not earn any interest to speak of. With a high-interest savings account, you get the higher returns without having to take on the risk that comes with putting money into the investment markets.

Instead of just sitting on your money, consider shopping around and take the time to find an account that actually will give you what you need. You’ll be pleasantly surprised when you check your account balance

Similarly, you can make investments that pay interest. Your reward for making the investment is the interest you’ll earn.

Sunday, October 14, 2012

INFLATION

Usually some of us lament that during the child hood days of our father for Rs.1/- we can buy Vegetables required for 1 Week. But now we can buy for that same one rupee not even sufficient for a Sambar ( A liquid gravy used to mix with rice for noon lunch ) once a day. Moreover below Rs.5/- it is almost impossible to purchase anything nowadays.

From the above wordings we can truly realize that the Price hike of all materials would be rising even if we like or Dislike. This price hike is termed by “Inflation” by Experts Worldwide.

In all countries it is denoted in Percentage. If the Inflation is 10% then a material which costs Rs.100/- last year, now to purchase the same material Rs.110/- is required. Many people used to say due to the Inflation hike, Prices had gone up. Actually it is not like that. In turn the price hike had increased the Inflation. Several Essential products price index no: is taken into account and compared with the same period of the previous year and calculated for respective week.

It is called the “Base Period” when the inflation was first formulated. In India for calculating inflation “Whole Sale Price Index – WPI, method is followed. Common public using 435 products are taken into account .These products are called as “Basket of Goods”.

Each product has an Weightage. This weightage, with price hike is being taken into account and WPI calculated. The percentage change is called Inflation.

But in several countries instead of Wholesale price Index they are taking the final cost of price reaching the customer called as “Consumer Price Index”. Even India is trying to change to this.

Inflation rate how affects a particular country and its people must be known to us. Why Essential products and Grandeur products price hike is happening can be researched for understandable. While the cash flow being more, requirement with low (supply ) availability will be present. Since our requirement is more, the production is compared less, to the required quantity, the price hike is happening. Since the materials such as

1. Rice
2. Grams
3. Petrol
4. Dress materials
5. Food items
6. Railways
7. Bus transports
8. Cigarettes
9. Liquors
10. Air travels
11. Real Estates….etc.

For all the above items people are found crowded everywhere. From the above cash flow can be meant as fair. Looking for a good way to explain inflation so that even a child could understand it?

Inflation has been called “The Silent Tax” or stealth tax. Often inflation is explained as something that is just a part of economics and should be accepted. However when you truly understand what it is and what it means you begin to see that it is simply a tool used to enrich those in power of the money supply and tax your money without having a tax.

Here is a quick and easy way to understand how to explain inflation. Often we throw the term inflation around when referring to how much more expensive things are when actually it would be more accurate to say that your money, or even more accurately, your currency is worth less.

When trying to explain inflation to young people you may find it more entertaining to provide visual aides. For this you will need a quarter ($.25) from 1964 or before and a quarter from after 1964.

Now if you had this older quarter in your hand in 1964 you could use it to buy about a gallon of gasoline, because gasoline sold for about 25 cents a gallon give or take a couple of cents. Also if you kept that quarter until today you could sell it for enough money to buy about a gallon of gasoline because the silver in the quarter is worth about the same as a gallon of gasoline today.

This is because the quarter from 1964 and before had at least a 90% silver content. The value of that silver has stayed about the same as in 1964, meaning you could buy about the same stuff with it. However the quarter from after 1964 will not buy as much because its value is not based on its metal content and the supply of them keeps going up.

You should have noticed that the newer quarter has a copper toned ring around the sides. This is because the newer quarter is made of various metals which when melted down would not be worth very much. But since it has been stamped into a quarter we can use it as currency to buy things we want or need that have a price tag of 25 cents or less.

So when the government prints more and more dollars it makes the dollars in your pocket worth less. And since the dollars do not have to be made of anything valuable then they can print more when they need it and after it starts to circulate it makes your dollars worth less, because the more of something there is the less valuable it is right?