Future Value of money – Compounded Monthly You deposit Rs 50,000 for 5 years at 5% interest rate compounded monthly. What is the future value? (i equals .05 divided by 12, because there are 12 months per year. So 0.05/12=.004166, so i=.004166) FV= PV ( 1 + i ) N FV= Rs. 50,000 ( 1+ .004166 ) 60 FV= Rs. 50,000 (1.283307) FV= Rs. 64,165.
GOING BACKWARDS. Present Value of money – Compounded Annually You will receive Rs 50,000 5 years from now. How much money should you get now instead of Rs 50,000 5 years later if the interest rate is 6%? (i=.06) Rs.50,000 = PV ( 1 + .06) 5 Rs.50,000 = PV (1.338) Rs.50,000 / 1.338 = PV Rs. 37,370.
Present Value of money – Compounded Monthly You will receive Rs 50,000 5 years from now. How much money should you get now instead of Rs 50,000 5 years later if the interest rate is 6% calculated on monthly compounding basis? Here , (i equals .06 divided by 12, because there are 12 months per year so 0.06/12=.005 so i=.005) FV= PV ( 1 + i ) N Rs.50,000 = PV ( 1 + .005) 60 Rs.50,000 = PV (1.348) Rs.50,000 / 1.348= PV Rs. 37,091.
KNOW IT A rupee received today is greater than a rupee received tomorrow because money has ‘time value’ The time value of money is the compensation for postponement of consumption of money. It is the aggregate of inflation rate, the real rate of return on risk free investment and the risk premium. ‘Time value of money’ can be different for different people because each has a different desired compensation for postponing the consumption of money.
Hi all, because of some reasons got late to post on this topic.. Here is My first post on this.. From this post onwards, I am going to kick off the discussion on shares as an option to create wealth. First, nobody gets rich quickly in stock markets. Some of your friends might have blindly invested in some stocks which, to their luck, gave them exceptional profits. Yet, they never became rich. Did they? So that’s the first truth about stock markets – it’s not a place where you get rich quickly.It takes time to grow your money. Second, it isn’t easy for beginners to make money on the stock exchange. If it was such a simple exercise, Mr. Warren buffet wouldn’t have become so famous. It takes genuine effort to spot profitable investments. Third, your broker, friends, neighbor, colleagues et al would come up with ‘sure shots’ everyday; there are too many stock analysts out there giving out fee based stock recommendations. It’s easy to get tempted by all these people around you. After many years in the market, my thoughts keep wavering when somebody comes up with such ‘sure shots’. Should I explain the fate of a beginner? It’s important to stay off from these temptations. It implies that you ought to have ‘independent thought’. Independent thought is something very hard to carry through. Fourth, most of the investors are a bit too casual with stock markets. They ‘play’ in stock markets. Stock exchange is a wrong place to have fun, speculate and try luck. The Stock market is actually a place dominated by big investment houses and financial experts. This is a place where the world’s brightest finance professionals put their best efforts to make right investment decisions. Nobody is playing around. So, to be successful, you too, need to be serious. You have to view it as a business. When you buy shares, you are buying a company to that extent. Buying a company is no Fun! Fifth, realise the fact that broker’s income is the commissions you give. The more you trade, the more they get. When I was serving as the manager of a broker, I used to get monthly targets for the volume of brokerage that should be generated. If I don’t do that, my salary payment gets delayed. Each branch was viewed as a profit center. Myself and my colleagues used to hit our targets but our investors rarely did! Most of the brokerage houses encourage their clients to do as many trades as possible whether it’s good for them or not, and keep doing it until you have used up all their money. If you get too many frequent ‘Sure shot market tips’ thru sms, mails and phone calls – think twice. Your broker may be interested only in generating commissions. Make sure you don’t get into such traps. Do have faith in your broker, but don’t blindly follow them. They can give you advice but they can’t guarantee that you will make a return on any investment in the stock market. Sixth, as you begin to study the principles, you’ll hear about derivative instruments like futures and options. Instruments like options and futures are NOT for beginners with limited resources. They are highly technical, involve the potential to lose all of your investment quickly and need constant monitoring. Playing Futures and options without adequate working knowledge is like gambling at Las Vegas. Finally, you have to keep on working on your stock picking skills. Keep following the market developments. You’ll also need to study some basics on economics, accountancy, income tax and mathematics.
so, # No quick riches in stock markets # it’s not the place to have fun with money # you shouldn’t be blindly believing your broker’s recommendations # never try your luck # and, learning is the only way -to make right choices in stock markets. So, let’s begin from the roots. My next post would explain what shares are.
Stocks-explained INTRODUCTION The first step for anyone who aspires to invest in stocks , is to understand stocks ! The words stocks and shares mean the same thing. Share means a portion of anything. In our context, share means a portion of ownership of a company.Now,it would be better to discuss this concept with the help of an example. This will help you to get a clear idea of what a share is. Lets try to explain that with the story of a company called ‘Say-it-with-flowers’. SCENE 1- The beginning A group of girls decides to start a business. Since they knew floral decorations, they decide to start a flower shop. They name their business as ‘Say-it-with-flowers’. For initial expenses, they borrowed some money from the local bank and opens their shop in a small space. The business was successful. However, they made little profit because; all the earnings were invested back into business since the customers were increasing and they had to meet the growing demand for their floral decorations. SCENE 2- A decade after. Ten years later, the bank loan has been paid off. Profits are over Rs 10 lakhs per year. It also has a book value of Rs 50 lakhs. (Book value is the net value of what the comp any owns- machinery, furniture, building less any loans). Having made their business a success, the girls now wants to expand their business. Their idea is to open two more branches at neighboring towns. After a detailed study, they find out that it’s going to cost over Rs 52 Lakhs to open two outlets. To find this 52 lakhs, they had two options- one, take out a loan from the bank. Two, sell part of their company. Since interest rates are high, they decide to take the second route. But how? What would be the cost of a share in say-it-with-flowers? Who will do the valuation? There were several questions to be answered. SCENE 3-The big leap To sell part of their company, the company has to be valued. The person who values a company is called an ‘underwriter’. So they approach an underwriter who checks their past records, future prospects, background of the promoters etc, The underwriter decides that the company is worth 10 times its current profits. The current profits is 10 lakhs. So 10 times 10 lakhs is 1 crore. This one crore is actually an estimate based on various qualitative factors. Add book value to it, and you arrive at Rs 1crore and 50 Lakhs. This means, “Say-it-with-flowers” is worth Rs 150 lakhs. 40% of 150 is 60 lakhs. So, the girls decide to sell 40% of their company.A group of investors who were willing to buy the 40% shares in that company gives a check for Rs 60 lakhs. The girls still have control over the operations of the company since they still have 60% share. SCENE 4- The benefit Now, For the girls, 40% stake is lost but they get 60 lakhs in cash. They have the money to expand their business.As planned, they opened two new outlets for Rs 52 lakhs.The balance 8 lakhs is used for day to day operations of the three shops. Both the new stores hit a profit of 10 lakhs a year. That means the total profit of the company Say-it-with-flowers is now Rs 30 lakhs. ( 10 lakhs x 3 shops ). The value of the business is now Rs. 450 lakhs (3 shops x 10 lakhs x 10 times + 50 lakhs x 3) and the couple’s 60% stake is worth Rs 270 lakhs.(450 x 60%) SCENE 5 – At the stock market. Since the investors who bought 40% of the share for 60 lakhs, is now worth 180 lakhs, the shares of say-it-with-flowers is in great demand. Since the company increased the wealth of shareholders 3 times, there are investors who are willing to purchase the shares even for an amount higher than 180 lakhs. Each day, shares of say-it-with-flowers are sold to the highest bidder. The place at which the bidding and buying process takes place is called the stock market. SCENE 6 – You as an investor.. Let’s assume that the total shares of the company are 50,000 shares. So, 40% available to the public is 20,000 shares. The issue price was Rs 300 (60 lakhs/20000) but, now the share is worth Rs 900(180 lakhs / 20000). Since a section of the public feels that this winning streak of the company would continue, there is heavy demand for the share and due to this, the price keeps moving up. Suppose the price is Rs 1250 now. Should yo u buy?The answer is –no. Why? Because, the shares are trading above the ‘real value’ of Rs 900. This real value is also called ‘intrinsic value’. Price drops to Rs 750. Should you buy? Now, one day, due to some rumors, the stock market crashes, and consequent to that, the price of the share plummets to Rs 750 per share. Should you buy? May be, yes! Why? Because, now the share price is below the real value and some time later , you can expect the rumors to settle and that will result in the prices moving back to it’s original level of Rs 1250 or more. Where should you sell? Although the price may move back to Rs 1250, your selling point theoretically should be at Rs 900 . Why? Because that’s the actual value point. The price rise above Rs 900 may be due to several reasons like investor sentiment which should be ignored. CONCLUSION. The good investor’s job is to identify companies like say-it-with-flowers that are selling below their true worth due to some illogical reason and invest in such stocks.
STOCK INDEX. The stock index function as an indicator of the general economic scenario of a country / region / sector. If the stock market indices are growing, it indicates that the overall general economy of the country is stable and that the investors have faith in the growth story of the economy. If, however, there is a plunge in the stock market index over a period of time , it indicates that the economy of the country is in troubled waters. It’a also an indication of what the corporates in that country are facing. A stock index is created by selecting a group of high performing stocks . For example – The FTSE 100 ( the stock index of London stock exchange) is constructed from the top 100 companies trading in the London stock exchange. If the FTSE 100 records a jump over a period of time, it indicates that most of the top 100 companies in England are doing well at that point of time and that the investors are positive about putting their money in England. TYPES OF INDICES There are different types of indices and FTSE 100 was just an example. Stock indices can be constructed - For the entire world ( global indices) For an entire continent ( regional indices – for example S&P Latin america 40) For an entire country ( national indices – for example Sensex & Nifty for India ) For a particular sector in a country – ( sectoral indices – for example BSE BANKEX which tracks top banking companies in India) For any other theme / group of economy / companies you want to track. ( example Dow Jones Islamic world market index) The MSCI global and the S & P Global 100 are examples of world stock indices which tracks the largest companies in the world irrespective of their country of origin . The MSCI global id an index with over 6000 stocks included from different parts of the developed world. It specifically excludes companies from emerging economies. When stock indices are constructed to track the performance of the economy of a country ( like Sensex in India), it called a national index. Irrespective of the type of index, the purpose of any index is the same. It provides to the public, a quick view of how the economy ( based on which the index is constructed) is functioning. A sudden slide in indices denotes that the investors have lost faith . There could be several reasons for that like poor economic reforms , high inflation, high borrowing costs, amendments in laws that not well received by the business community, downgrades by world credit rating agencies, scams , corruption .. the list is end less. These indices also serve as benchmarks for measuring performance of fund managers or for measuring the performance of an individual’s stock portfolio. CONSTRUCTION OF STOCK INDEX A stock index can be calculated in two ways - By considering the price of the component stocks alone. This method is called the price-weighted method. By considering the market value or size of the company – called the capitalization weighted method. To conclude, stock indices are barometers to measure general economic performance of an particular country / sector. It’s updated every second throughout on every trading so as to reflect the exact picture of the economy. It’s also a permanent record of the history of markets – it’s highs and lows, booms and crashes.
