How Can A Person Become Rich

Published Date: 02 Nov 2017

A Guide to an Investor

Better??? The reason being I cant change the title now, a subtitle can be added.

[Pick the date]

[Type the abstract of the document here. The abstract is typically a short summary of the contents of the document. Type the abstract of the document here. The abstract is typically a short summary of the contents of the document.]

Powerful Questions:

The fundamental basics of every market and the returns its obtained over the past five years ( this includes the recession period and how the market evolved after the crises)

As a retail investor how can he understand his basic questions as to where and how to invest?

What is my prediction of the financial market and what are the few factors by which the markets impact?

Other Questions which I have referred:

How can the return of investment of each aspect be analyzed and compared?

What can be different when an individual invests and a company?

Are there any tax exemptions when we invest in different commodities?

The different tax rates applicable?

When must a person call or put?

How can it be analyzed as to where to invest and how much must be invested?

Technical analysis or fundamental analysis is better?

What can be better aspects of improving portfolio?

How can the risk in each investment be analysed?

Should we invest in bullish or bearish market?

How can we buy a share?

Analyzing the data, how that can be done?

Which gave better return?

Is it easy to invest in commodities?

What are the reasons by which commodities are effected?

The different index related?

How can you analyse the future rates?

How can a person become rich?

What does an investor look for while he is investing?

Is getting returns the only interest for the investor?

What is the real reason as to why the investments are done, are they for returns or tax benefits?

What benefits do investors get and how do they utilize it?

Is the financial market transparent and reliable?

Will the investments be secure?

What is insider’s trading? Does it impact the investor?

What was the main cause of the recession?

What are the different factors which alters the financial market?

Which market would be secure and yield benefits?

What would be the likely future of the market, analyzing each of it individually?

Shalu, you have a lot of good questions, in fact, a wide variety of them, First, are you writing as an individual investor, a company investor or an institutional investor. Please pick a perspective so you can weave everything from this perspective.

Your title suggests that if one knows the trends of the past five years, one can make an intelligent guess as to what is coming in the next five years. Is this your may position? If so, you will have a big challenge to prove it as the dynamics within markets and between markets are much harder to predict, as you probably know already.

Or is this just a simple guide for a new investor in what he or she should consider as they take the first steps?

A good thesis takes a point of view and develops it, weaving together various aspects. The danger is that you just "tell us about" a lot of interesting things without doing more deeply into the underlying dynamics. Do you understand what I am saying and why I am saying it?

I am writing as an individual investor. As an investor the person should know what he is getting into. In the past how the markets reacted, since it was recession and which market gave positive yield- such that the person understands the current scenario and invests efficiently. Prediction- this is totally my view towards whatever I have learnt, this prediction would be for 2013 specifically in depth and the other 4 years would be continued. This thesis gives a better picture to an individual investor as to what to look into while thinking to invest.

INTRODUCTION

"Money does not grow on trees but it can grow if the investor invests it efficiently." [1] 

If you are a genius and get a massive amount as your salary and you do not work well on your investments, it’s said that it would be worthless. Hence a person should know that the important aspect in his life is of having a secure financial wellbeing, for this basic plan are sufficient the person need not be a mastermind. Does that mean we won’t lose money if we have a basic plan?

If a person has a plan and at their bad times they would lose money but that would be minimal. The person would have attained the knowledge of making his losses less. Say a person who has no knowledge about the market invests Rs 1000. At some point during the financial crisis he would manage to lose the entire amount whereas a person with knowledge would lose (say) Rs 200. Hence plan is significant in no matter what we do.

Needless to say it depends on the investor as to how much money he would want to put in. As less than Rs.100 would be a good investment, the most essential characteristic is to educate you with the abundant opportunities. The investor should know it initially that there is no guarantee that he/she will make money from the investments. An intelligent plan could work most of the times but not all the times.

Wise investment would be the one which is done by fundamental and technical analysis with a part of your intuition also involved in it. How easy is it to learn both approaches at one? One could make wrong calls initially and would make mistakes too but that way a person could learn more. As to where the analysis went wrong and the investor could see through that he does not commit the mistake again.

Wise investor is one who is not greedy for money but one who loves making money, a live example we all know is Warren Buffet.

Once a person decides to secure his future there should be wastage of time further. ??? The person should know that no one is born with the perspective of knowing things. Person should learn and keep learning throughout, there is no end to it. Consequently if you want to be successful, you should start from the basics.

Start with making a financial creating a financial plan, pay off your debts and then start saving to invest. These are the basics that should be known.

Creating the financial plan may include a list of what the person wants his goals and desires. Some people would want to purchase a home or car. Others would want to purchase the Apple’s latest I-phone. So you have to save and invest for any of your Materialistic goals. Its better to make a list of the goals and also the timing when you want it.

The theory of growing money comes from two features.

Firstly, you work for money – Say a 9 am to 5 pm job which pays you for the work you have done.

Secondly, your money works for you – The money you acquire, you save or invest it.

Nice distinction.

Earning money has been the real essence of life but does it count for real happiness.

Real Happiness, it is a qualitative analysis when it comes to happiness. Happiness is a feeling which is an experience each human has in life. It is just not about money or the desires it’s much beyond that. It is an aspect when the inner spirit is satisfied and it is hard to measure it. Real happiness does not rely on tangible things but it is with the inner spirit. People think money is a way or is happiness itself but this is a total wrong belief. Life is a journey which should be driven by the driver, the human himself. The reason for which the almighty sent us if that is found and accomplished, may be then the ultimate happiness can be got. I am glad you mention happiness. Need we have a "happiness investment plan" for growing our happiness wealth?

Where do "Artha" and "Kama" come in? (.i.e. two parts of Purusartha)

Living in this world we have seen as generations have passed by happiness has become materialistic, which is also for a short period of time. Consider a youngster of age about 25 years who just got his job and at the end of the month he got his salary. Few years back according to Indian tradition the first salary would be given to parents as a respect, thanking them for all the years. But now in the present scenario this has disappeared, people have become money-oriented and they would purchase possessions for themselves- such as Play stations, Electronic gadgets and so on.

RICH DAD, POOR DAD [2] 3

-By, Robert Kiyosaki

Quote from the book, Winners are not afraid of losing. But losers are. Failure is a path of the process of success. People who avoid failure also avoid success.

This is the story of a person who has two fathers:

First father is his own biological father. The other is his Rich dad, who is his best friend’s father.

Both fathers had conflicting views on money. One Dad would say "I can't afford it" while the other would ask: "how can I afford it?"

There are 3 characters in the Novel

Poor dad – Well educated but lacking the street smarts

Rich dad – very little education (eighth grade), but highly street smart

Kiyosaki – the spectator who learns lessons from both but imbibes only rich dad’s traits

For a person’s learning here, Rich and Poor dad are two ways to live who are differing in every aspect. It’s up to Kiyosaki the author to head the direction, who portrays as an individual investor.

Poor Dad

Poor dad is compared to the millions of fathers who encourage their sons to do well in academics so they could get a good job with a good and reputed company. His aspirations were limited to having a good job with a solid company. He believed in buying only what he can afford. Hence he makes his disappointment evident when his son leaves his job with a reputed company. Poor dad looks to education as the pathway to success. He held a doctorate degree, went to Ivy League universities, but was always struggling financially. He believed he would never be a rich man.

The author wrote that his poor dad would always say things like, "I’m not interested in money" or "money doesn’t matter." The author felt that his poor dad was more interested in job security rather than on the job itself. In other words, being trapped in the Rat Race. Poor dad’s approach to the subject of money was based on working towards paying the bills. His poor dad worked hard but somehow was always financially weak.

Rich Dad

When he was nine years old he realized that his rich dad made much more sense than his poor dad. Rich dad taught the author not to say, "I can’t afford it", but instead to ask, "how can I afford it?" Rich dad paid the author and his best friend, Mike very low wages deliberately so that it would instill anger and a sense of injustice in them and eventually for them to realize that in order to get ahead, one must work for him and not for others. Rich dad taught the author that thinking about how to make more money stimulates the brain and that leads to action.

He says that when someone says, "I can’t afford it", his brain stops working. His rich dad was very skilled in the investment game because that’s all he did. The attitude of his rich dad about money was evident in the saying "the lack of money is the root of all evil". The author also believed that his rich dad also nurtured the idea that taxes punished producers and rewarded the non-producers.

The Son (Author)

The author begins his book by stating that he is fortunate in having had two fathers. Both of them taught him valuable lessons, but it becomes evident which father had the more sensible approach towards money. The author places high importance on accounting knowledge – no matter how boring it is - because he says it is "the most important subject in your life." He believed that the rich are the ones who are hardly taxed because they have the knowledge to use tax legislation to their advantage. He makes simple diagrams that show how the rich build up the asset column and the poor build up the liability column (expenses). He credits his financial acumen through the many conversations he carried out with his rich dad.

As an investor, we should consider that best of both the dad’s would end up in a good result. Being educated and learning every day in whatever interests us should be a basic concept. Living in this world can be broadly classified in two ways, like the rich dad who majorly concentrates on making money so that he can spend it. The other way is like the poor dad who concentrates on academics just to obtain job security.

My learning’s from both are we should take both into consideration. Education is important and surviving in this world financially is also the next important aspect. This could be by good investments. Make money but we should know the essence of spending them resourcefully.

Value for money

World we are living in, each person strives to achieve their goals in life. Most of them struggle keeping the high return in their mind, in other words they work keeping money as a priority. In India, you are valued for the income you obtain. Now let’s discuss if that is the only way a person can create their returns. Is it possible that a person who earns Rs 10,000 per month is better off than a person who earns Rs 20,000 per month?

Well, yes it is. Let’s discuss this here.

Well the reason for the answer, now consider Mr. A earning Rs 10,000 and Mr. B Rs 20,000. A puts his expenses aside and invests his savings in market and B spends, he does not consider investment. Hence the returns Mr. A will get is much higher than B. Main reason being value for money, todays Re 1’s value is much higher than tomorrow, real reason being inflation and GDP.

Now it is clear that investment is important, next question is How and How much to invest.

Let’s consider the latter part; a person can analyze himself as to how much he should invest. The measures he should take are the cash inflows he gets ( it can be per month or per annum). The amount he needs for expenses should be decreased; some cash should be kept aside for emergency purpose. If he has some loans to be paid, that should also be decreased. The remaining cash can be invested by the person to enhance the value.

The ways a person can invest, there are basically four standards: Equity Market, Debt Market, Commodities and Real Estate. The decision lies with the investor as to he wants to invest for short term or long term.

Before making any investment, one must ensure to:

1. Get written documents which explain the investment.

2. Documents should be read and understood.

3. Verify the legitimacy of the investment.

4. The costs and benefits associated with the investment.

5. Assess the risk-return profile of the investment.

6. Liquidity and safety aspects of the investment.

7. Ascertain if it is appropriate for your specific goals

8. Relate 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 should be done by 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 [4] 

Passive Income [5] :

Fundamentally there are two types of income, Active and Passive. In active income the person is executing his set of duties and gets income for the job he does. Whereas passive income is obtained every month by the person who is not active in his job but due to his investments he obtains the money. Few examples regarding this are, Rental income, pensions, dividends and interests obtained.

Whenever the person is investing he should look into the future and invest. For instance a person is about 30 years today. When he is thinking of investing he should see it such that when he is 50 years old he should get passive income. Since as time goes ahead 50 the person will soon retire (that is the possibility in most cases) so he should keep in mind the prospects in near future such that his present is not hampered.

Introduction to Capital:

Money is the most important ingredient and it acts like the energy flowing around. Every human spends most of their time in life to earn it. They say, no pain no gain!

There are people who take up risks and who don’t. People aiming with high risk could get high returns in terms of money, this is not a sure shot. Companies owned by Tata’s, Birla’s, Ambani’s, Bajaj’s are among a few famous people in the business world who visualized and created ambitious enterprises.

There are two types of capital, namely, Risk Free and Risk Capital. Risk free capital can be defined as the fund which is exposed to less risk. People with conservative nature invest in this type of funds, since they have fixed returns in any situation and is secure. Risk capital is one in which people who aim in obtaining high returns and do not mind the risk expose.

Interpretation of high risk and high returns in general are seen in, Real Estate, Commodities and so on. They are exposed to high risk but if there are profits, usually at higher level.

Initially the person would want help from some professionals regarding how they could pick stocks or good investments. There could be many other questions on the mind of the investors. A person can associate himself or join hands with the wealth advisory. The advisory management can put forth the good investment but the investor individually makes his call. Much of the market fluctuations are due to speculation. They would charge a basic amount from the investors for the advice they give, this is up to the investor to see if he is being benefited by them.

EQUITY MARKET

Equity is a word which is not only connected with stock market. It usually means that equity is linked to the ownership of an asset. For example, a car which has no outstanding loans is considered as an equity. Stocks are equity because they represent ownership of a company. A fully paid stock is considered as share.

MARKETS:

Equity is offered by two types of market,

By Initial Public Offers, which is the primary market and second aspect is the secondary market which is done by brokers and stock exchange.

Primary Market

It is a part of capital market where issue of new securities takes place. Public sector institutions, companies and governments obtain funds for further growth of the company after the sale of their securities or bonds in primary market. Underwriting, the selling process of new issues in primary market and this process is done by a group of people called underwriters or security dealers. This must be done to go about secondary market.      

Role of Primary Market

It deals with capital formation, it provides to issue potential investors and raise capital with the focus of lower cost. The other role of primary markets are liquidity, diversification and reduction of costs. As the securities issued in primary market can be immediately sold in secondary market the rate of liquidity is higher. - Many financial intermediaries invest in primary market; therefore there is less risk if there is failure in investment as the company does not depend on a single investor. The diversification of investment reduces the overall risk.

Features of Primary Market

It is the new issue market for the new long term capital. Here the securities are issued by company directly to the investors and not through any intermediaries. On receiving the money from the new issues, the company will issue the security certificates to the investors. The amount obtained by the company after the new issues are utilized for expansion of the present business or for setting up new ventures. External finance for longer term such as loans from financial institutions is not included in primary market.

Prerequisites for Investor to Participate in Primary market Activities:

PAN Number

Bank Account

Demat Account

Types of issues

Public issues can be classified into 3 types:

Initial Public Offering (IPO) – Fresh issue of shares or selling existing securities by an unlisted company for the first time is known as IPO. Listing and trading of securities of a company takes place in IPO.

Rights Issue – Rights issue is when the listed company issues new securities and provides special rights to its existing shareholders for buying the securities before issuing it to public. The rights are issued on particular ratio based on the number of securities currently held by the shareholder.

Preferential Issue – It is the fresh issue of securities and shares by listed company. It is called as preferential as the shareholders with preferential shares get the preference when it comes to dividend disbursement. 

 

The regulation of this is done by SEBI, Securities Exchange Board of India Act,1992. The main purpose for this act was for the protection and regulation of investing.

Powers of SEBI

It approves by−laws of stock exchanges. It approves to require the stock exchange to amend their by−laws. It inspects books of accounts of financial intermediaries. It compels certain companies to list their shares in one or more stock exchanges. Levy fees and other charges on the intermediaries for performing its functions. SEBI can grant license to any person for the purpose of dealing in certain areas. It delegates powers exercisable by it.

There’s a new feature on the stock markets, called "Algorithmic Trading" [6] 

Algorithmic trading is the use of electronic platforms for entering trading orders with an algorithm which executes pre-programmed trading instructions whose variables may include timing, price, or quantity of the order, or in many cases initiating the order without human intervention.

SECONDARY MARKET

http://www.simplifiedfm.com/wp-content/uploads/2012/07/secondary-market.png

It refers to a market where securities are traded. This is done after being initially offered to the public in the primary market. They comprises of equity markets and debt markets. The main reason for secondary market is, it provides liquidity for shares issued in the primary market and determines the fair prices of the security. The platform for trading is provided by the stock exchanges which are recognized by SEBI.

There are two major stock exchanges in India, namely Bombay Stock Exchange and National Stock Exchange. After 1995 almost all the forms are stock are in dematerialized form.

There are various stock sectors in both the stock exchanges. Few of them are as follows, Banking, Metal, Power and Energy, Commodities, FMCG and so on.

GOLD

A bar of gold what is so uniquely special about this bar!

There are many precious metals but gold and silver are given more preference throughout the world when it comes to investment. It is an hedging instrument used by retail investors as well as the big organizations. Gold is an investment which saw an increasing trend since years and in the course of inflation gave better returns.

A little history on gold,

This is the oldest instrument for purchase of any product or even a mode of payment. There have been records of this with as old as 560 B.C and it is still seen as one of the best instrument to invest.

The core reasons why people invest in gold have been, it has been the most safe and sound investment. When people have money and have no idea or time as to where to invest, gold has been a savior. Many people purchase it for mere method of diversification against the stock market. History is the proof of the gold rates which has shown tremendous growth, which will be the same in future.

It is the most tangible asset which is not spacious and hence easy to handle and maintain. The supply of gold is decreasing and hence by the economic law which states, supply and demand are opposite. If one increases the other decreases and vice-versa. Gold is a commodity, hence there will be a time (which is soon) when gold supply will decrease and hence the demand will increase. If so the situations the prices will rise as years pass by.

How a person can invest in gold, the different ways to invest in this are mentioned in detail below:

From past few years it’s been noticed that, gold is one of the way where the investors are making good returns and being specific, least risk returns. Gold investment gives a good deal of flexibility and security. When gold is compared to other regular stocks, yes gold has fewer returns. When we consider the opportunities are endless as gold stocks are at relatively good price.

Though more money can be printed at a given moment, there is no way more gold can be made. Gold can be added as a security since there is limited supply available.

Gold futures

In a bullish market this instrument gives better returns. If the investor is lucky enough he could make 10 times more than what he invested. There is lot of risk involved in gold futures.

Gold Exploration Companies

This is similar to the gold futures when it comes to dealing with the risk. It particularly means that you are investing in a company which is in search of gold. The consequence could be dreadful.

Blue chip gold mining stocks

They are big time money producers for many investors. They are those businesses which have already operating mines of gold and hence generate cash. They put the profits back into the company so that new discovery of mine is made.

Gold mutual fund

This is one of the safest form of investing in gold. Here you trust a mutual fund company and they have a made up portfolio of the investor and gold is a hedging for them. This is done such that if there are losses in stock market, gold will hedge the investor’s portfolio.

Gold Bars, Bullion and Coins

This gives a direct ownership of gold. The prices move along and they are considered as a secure instrument. Collective of gold contributes to a huge investment.

In India,

Purchasing of gold is more inclined to tradition. That is the reason people buy gold every year. An auspicious festival called Akshaya Tritya is celebrated just few days before Diwali. This day is considered auspicious to buy gold. 

When daughters are born, their parents start investing in gold for her ornaments which she will wear on her marriage day. Gold is considered holy during pooja’s (while praying god).

Have a look at the prices of gold in India,

Year

Price (INR)

2007

28282.9

2008

36905.42

2009

45553.33

2010

54480.08

2011

69863.67

2012

88335.42

The above table and the figure depict the historical price of gold from the year 2007 – 2012. In the year 2007, the price of gold was 28282.9. During each year there were fluctuations in the price of gold but it is seen annually there has been an immense growth in the price of gold. It is observed that despite the big recession throughout the world, gold still showed a positive trend. Post-recession the price increased much more than the expectation.

DEBT MARKET

These are the markets issue, trade and settle in fixed securities of various types and features. The funds which are borrowed by government are to fund various development activities, which could be direct or indirect. Funds which are borrowed by companies, banks and many corporate bodies are usually for short term.

The fixed securities here are one’s which involve fixed income per month. The income is different for different scheme. Say Mr. X has bought a debt scheme for about 10,00,000 at the interest of 10% p.a. Mr. X would get 1,00,000 per year as income. This would give an advantage to people who need extra income, and also for people who are retired.

They are ones which come in a box of safety, and are reliable. It also involves liquidity, and flexibility. There are debt schemes available, namely, Money Market instrument, Certificate of deposit, Commercial paper, Bonds and government securities.

This market is the only one where a retail investor cannot invest directly and hence does it through mutual fund. Mutual fund is a scheme where a debt manager collects money from different investors and invests on their behalf. He collects his commission and pays back the interest and profit to the investors.

BOND MARKET:

They are different than money market; here the instruments the investor can indulge in will have a term of more than a year. It can go up to 30 years. These are long term borrowings done by the government and certain corporate bodies which need funds to operate. They have the coupon rate which is the interest, the issue date and the maturity.

Basically the risks involved in this market are the credit risk – this is occurs when the borrower is not able to pay back the lender. Liquidity risk – when the time of repayment comes, the borrower is not able to pay back the principal and the major risk is the interest rate risk – there are many fluctuations with the interest rates, the borrower could lose an opportunity to earn more.

The different types of debt schemes:

Retail Plan

This is relevant for small investing amounts ranging from Rs 5000 to Rs 100,00,000. Expenses would range up to 0.50% to 1%.

Institutional Plan

These are for the middle level investors, which range from 100,00,000 to 500,00,000. The expense ratio would be less than retailer plan, 0.40 to 0.60%

Super Institutional Plan

These are for big investors which range from more than 500, 00,000. The expenses would be the least, which will be about 0.20% to 0.30%.

Considering the above, the retail investor obtains the least returns when compared, since they have a high expense ratio. Hence many investors prefer to pool in their money for investment, by this the expense ratio would decrease hence would give better profit return to the investors.

The different types of debt mutual funds are, liquid funds, ultra short term funds, floating rate funds, short term funds, income funds, gilt funds, fixed maturity funds. The above are the funds in which an investor can invest. All of this can be done by mutual funds and if an investor wants to indulge in this, this is the only option.

Reason as to why debt market is needed, it’s a method of channelizing the person’s saving into good investment such that returns are obtained after inflation. Investor is satisfied for the yields he would obtain and on the other hand the corporate and financial institutes which are in need of funds achieve that. Hence it is a win-win situation both the sides.

In India,

Debt has many regularity restrictions on institutional investors. Banks are prevented of investing in unrated debt market. The insurance companies have a limited amount of which they can invest in the market. Insurance and pension funds have a huge potential in providing a big contribution to this market. There is lack of demand since the regulatory restrictions exists.

SILVER MARKET

The description of silver is, white colored shiny element that is very useful for jewelry, coins and tableware. It’s also very useful in chemical experiments and thermal activity. It’s called argentum in Latin.

This is considered as precious metal but most of the times its second to gold. But silver is the only metal which has more use in the industry and other sectors. Mexico is the leading silver producer in the world. [7] 

In India, it hardly produces silver and imports it majorly. It can never meet the demands hence it imports them. The country it imports are from - China, UK, European Union, Australia and Dubai.

The main question lies, why an investor should invest in silver. Once you buy the instrument, the precious metal, investor must remain calm in spite of any decline since investor is investing in something real and soon the market will realize the value and hence it will appreciate. This is the main reason for investing in precious metals.

Let’s go to a little history of gold and silver for better understanding. For over 5000 year’s currency were prepared by gold and silver in most parts of the world. Because of the easiness of money handling purpose currency notes came into existence. The real fact remains that gold and silver are real money for the real reason still.

Hence it has been noticed that if a person invested his money in precious metals he obtained more returns than investing in currency. The below diagram depicts that dollar value decreased as years went by but gold/silver increased immensely. Reason being currency value decreases since a value of dollar today will be of less value tomorrow. However, an ounce of gold/silver will have more value tomorrow.

In India,

Year

Silver (INR)

2007

17826.17

2008

20731

2009

22918.17

2010

30289.08

2011

53167.33

2012

53420

The above are the figures of silver in India. Silver is mostly after gold but since 2010 there has been more returns from silver hence people are getting attracted to this metal more since then. Say a person invested about RS. 10, 00,000 in silver in about two years he would get back almost RS. 17, 00,000, this is almost 70% returns.

Looking into it as a graphical format,

A steep increase was seen after recession period. Where gold gave about 25% returns, silver outshined drastically hence attracted lot of people towards this metal. The main reason being, silver could be invested with a lesser amount and more quantity involved with more utility, it attracts the general public.

One of the theories used to analyze silver is silver/gold ratio. This calculates the number of ounces of silver it would take to buy an ounce of gold. Assumption is that 17:1. Silver to gold ratio has fallen from 70:1 to 35:1 and is expected to fall more. The only problem with investing with silver is it will be more volatile than gold.

In India, silver prices are influenced by International silver price and the Rupee V/S Dollar value.

Reasons as to why an investor should invest in silver.

Silver is a commodity, it’s a known fact as time goes ahead commodity in volume will decrease which will result in high demand. Silver is a metal which is being traded in a good combo of quantity and price hence investor must see the returns he could obtain after investing in it. One should educate himself on what he is doing. If a person wants to invest in silver he should learn about the rates and the trends related to it. Investor should catch hold of low entry points and but silver. This is the current trend which is seen in India right now. Since silver rate is less as of today hence an investor should think about investing in it.

When investment is done, the investor owns an asset, which results in more power and value in a psychological manner. Here the investor would safeguard his money from inflation and unstable stock market. You have your money in the form of metal and this would fetch more returns than the currency notes. [8] 

Secondary Market [9] 

Markets have been discussed previously, where they are of two types. Primary and Secondary Market are the two types. Here we will discuss about the secondary market.

The secondary market is the financial market for trading of securities that have already been issued in an initial private or public offering. Alternatively, secondary market can refer to the market for any kind of used goods. Once a newly issued stock is listed on a stock exchange, investors and speculators can easily trade on the exchange, as market makers provide bids and offers in the new stock.

In the secondary market, securities are sold by and transferred from one investor or speculator to another. It is therefore important that the secondary market be highly liquid and transparent. Before electronic means of communications, the only way to create this liquidity was for investors and speculators to meet at a fixed place regularly.

The stock exchanges in India, under the overall supervision of the regulatory authority, the Securities and Exchange Board of India (SEBI), provide a trading platform, where buyers and sellers can meet to transact in securities. The trading platform provided by NSE is an electronic one and there is no need for buyers and sellers to meet at a physical location to trade. They can trade through the computerized trading screens available with the NSE trading members or the internet based trading facility provided by the trading members of NSE.

There are two main stock exchanges which exist in India. The Bombay Stock Exchange which is known as BSE and the other is National Stock Exchange, better known as NSE. BSE is the one of the oldest stock exchange in the world and NSE was developed in 1992 such that it heads with the technology.

BSE has a well-known index known as Sensex, this consists of 30 companies from different sectors. The analysis is done from the year 2007 to 2012. Looking at how much returns did Sensex give in that period. The table is given below:

YEAR

SENSEX

2007

20286.99

2008

9647.31

2009

17464.81

2010

20509.09

2011

15454.92

2012

18793.44

These are the data given above, now depicted it in a graphical format to understand it in a better way. The points are plotted in the respective X and Y Axis.

From the above graph it can be seen that Sensex was at its peak in the year 2007 but after the great fall, the recession in the year 2008 Sensex had a lower side. It still has not reached the same level as before. The reasons of recession have been very well said in the document Insider’s Job, which I will be telling about later.

Coming to the NSE, this has its index as Nifty- which consists of 50 companies from every sector. Below the table and the graph is plotted to give the returns.

Year

Nifty

2007

4670.936

2008

4010.279

2009

4302.414

2010

5490.725

2011

5319.929

2012

5320.935

From the graph above it has seen that Nifty did better than Sensex, since it has increased in present after the recession. Looking into the numbers 2007 year, Nifty was 4670 but in the year 2012 its 5320. Which is about 14% returns which would have been obtained by an investor. Whereas, the person who would have invested in Sensex will have losses till now.

Individual Investor’s:

As discussed in the Introduction, that person should invest to get good income. The problem lies as to where and how he should go ahead with it. Basically there are few criteria before an investor places his money. They are as follows, [10] 

Firstly they should have information about themselves as to how much they are investing, what return factors they can incur, the scope and time period they could invest. Once their personal information is obtained – why are you investing, how much you want to invest, where is the opportunity and for how long, the amount of risk that you can take. This should be a motive to obtain the further course. Referred - personal road map.

Secondly you should see the financial market risk. As to how much risk exists in different markets. Say for example equity market is much risky than the debt market. Hence an investor who is risk averse would indulge in debt market than equity market.

Thirdly, the investor should not keep all the fruits in one basket meaning, the investor should have an appropriate mix of investments. The asset allocation should balance the risk and returns. If the person lost in equity market he could gain from debt market. Prevailing the market conditions, if one asset incurs loss or gives poor returns there is high probability you could get better returns from the other asset, conditions being the investments are done different markets with better understandings of the desires. In other words, diversify your investments.

Pick up the right group of investments, such that you could limit your losses. Make sure you have some money when needed during emergency. The income you obtain must be sufficient for you to survive that duration. Say you lost your job, the person should know how much money he needs to survive during a month, and invest in those instruments which would give that much yield.

The debt the investor has should be considered before the investment. If a person has a debt of say 100,000,000. He should pay the interest as well as the principal; there is no point in increasing the duration of the payment. Since the interest keeps increasing, you owe more and hence it’s better off to pay off your debts than investing the money.

Rebalance your portfolio occasionally; this depends on the market situation. The portfolio must not be inclined towards more risk, as for the benefit for the investor. The investor should have one strategy on his mind- BUY LOW, SELL HIGH. It is easy to tell this but hard to implement.

C

D

A

B

There is a difference in theoretical and practical aspect, we will discuss about this from the diagram above. Say there are four points, A, B, C and D. In theoretical method they say it is an ideal way of buying an investment at point A but in reality how could an investor know that from the point A onwards there is an upward trend. Hence in reality after some fundamental analysis or by obtaining genuine news an investor would consider to buy the instrument at point B. The other two points C and D would represent the feature of selling the investment, where C would be the theoretical point and D the reality.

As An Investor What To Look Out In The Coming Years!

"Firstly, expect to be wrong in the stock market". Yes this is hard to digest but it’s true. If you are going right well and good but if you took the wrong verdicts then you are supposed to correct it almost immediately. Ego is one of the foremost reasons for a default, this has to be overcome. As an investor it’s important to develop a strong respect for being modest with the stocks you select.

A simple question should be asked by the investor- Stock or Bond? Before getting ahead with this lets know what they are,

A stock is a share of a company and the cost of the share depends on how the company is performing. Bond on the other hand is a financial instrument which is issued from one person to another when money is lent. Bond is a promise made by the borrower that he will pay back with a certain interest. Bond is the one which gives passive income which are basically the interest.

Total wealth of the person depends on the Human Capital and the Financial Capital of the person. This is the two aspects which were told in the introduction of the thesis, the salary obtained by the job and the income obtained by the investments done with the savings respectively.

As an investor, he thinks about many risks – market, political, inflation. The main risk he should concentrate on is the personal risk. The Personal Risk consists of two factors, Age and the job the investor does.

Let’s discuss the first factor, Age. The young the investor is its pre dominant that he has more Human Capital than Financial Capital. It is most likely a thumb rule that as younger the age the person should invest in stocks or equity related mutual fund whereas on the other hand when a person is of the age 60 and about to retire, he would not have sufficient Human capital and hence would be dependent on the Financial Capital, this is when bond comes to picture. The people holding bond would expect a certain amount being credited to their account, which would help them with their basic spending.

The other element of personal risk is - investor’s job. Look into the diagram below:

http://www.safalniveshak.com/wp-content/uploads/2011/07/Stock-or-Bond-2.png

It’s an insight analyzed that if a person has a stable job such as a banker, doctor and so on whose salary is not going to be effected by the fluctuations of the market, hence the investors human capital is much like a bond whereas his financial capital could be inclined to stocks since he could incur risks at any stage, because he has a stable income every month.

If the person’s job is an aggressive one such as investment banker, stock market analyst – their Human Capital is similar to the Stocks, because their salaries are dependent on the financial markets. If the market does well they earn enormous amount but if markets are not doing well then their Human Capital could be low. These professionals should invest their Financial Capital in bonds, such that at any financial crisis they have a certain amount of the income for basic needs every month.

There can be many ways in which this can be viewed, but this is the basic understanding explained here.

The investor must keep in mind both the Capitals, i.e. Human and Financial. If one of them increases the other compensates for it. A basic life cycle is considered from the diagram depicting that the Total wealth of an individual is a sum of the Human Capital and the Financial Capital. As the age increases, the Financial Capital is seen increasing - this is solely because the investor has invested in the right instruments at the right time. This can be attained by any individual.

http://www.safalniveshak.com/wp-content/uploads/2011/07/Stock-or-Bond.png

__

A normal perception of an investor,

http://www.safalniveshak.com/wp-content/uploads/2011/07/Overconfidence.png

The above illustration is self-explanatory, this happens because of few reasons- wrong judgment, after all the learning - getting carried away with the decision and if the investor realizes that he made a mistake, let go of the ego. Admit that you made a mistake and go ahead. Have the confidence while investing but over confidence should be evaded.

The investor should overcome the emotions of fear, loss and desperation. This leads to erroneous outcomes. When the market is good, investors have a presumption of doing well throughout. It must be known that change is constant. Hence once a different trend is perceived investors get curious and make wrong decisions.

Value investing

Whenever you talk about this term, people have a perception that it is linked with the Price to Earnings ratio or the price to book value. But reality is much more than this. The term investing refers to buying cheap stocks in the market whereas value investing is having a clear idea of what you are buying.

In simple words, a person wants to prepare food without having a prior knowledge of what the ingredients would be. The person goes to the grocery shop and purchases the items such that they are cheap. The reality is that he would not want most of them and this would be un-necessary. On the other hand a person has the knowledge and wants to prepare, say cold coffee. He would buy the necessary ingredients rather than buying spices!

Benjamin Graham, who is the father of value investment, has stated that, The investment is an operation which should be done after good knowledge and analysis, such that the principal invested should give good returns. This is the basic of value investing else it is speculative.

Coming to more on value investing, this could be explained in one word – Challenging. The investor must have abundant patience, he should be disciplined, should not be very emotional while dealing with investments, read and have more information and be ready not to join the rat race. All this takes a lot of hard work and courage. The best part is there are very few people abiding by it.

The term itself says it all, value investing, what investment can seek if it does not obtain the basic value to it.

Intelligent Investor

This was put forth by Benjamin Graham, he used the word intelligent signifying the knowledge and understanding one should have during investment. The main criteria is to have a scope and set up objectives and stick on to them.

He says that the investor should require good charisma, and he has put this into a toolkit, have a look below:

http://www.safalniveshak.com/wp-content/uploads/2012/10/graham_mental_toolkit.png

To become an intelligent investor, all the four components must be achieved, which becomes possible only when the person is willing to do so. This basically includes the core of emotional discipline and self-control.

Reasons to invest [11] 

There are many reasons as why a person should invest in stocks or other financial instruments.

The first foremost reason is clearly make money. The stocks bought could be credible two ways namely, the increase in the stock price and as well as the dividends. In case of debt, the investor obtains interest per month. This could be beneficial for people who are retired or unemployed.

The other reasons could be that they are flexible; you can invest anytime and exit anytime. There are many tax advantages involved but this is mostly secondary reason to invest. To obtain good returns, this goes hand In hand with the risks involved. It is a phrase that Higher the Returns will have High Risks and vice versa. This need not be the case for all the financial instruments. Considering the time period, if the investor increases his time limit he could be secure. All of the above need not be true all the time, this is considered as ideal situations.

An investor has a desire to own a company but lacks the capability. This could be due to many reasons – not capable right now, cannot give time to his desire, and has no idea in mind currently and so on. His desire can be fulfilled such that he could buy a share of a company and hence evolve as a shareholder of that particular company which is one of the partial owners of it.

Transparency In Financial/Investment Sector

Market transparency [12] is a central design feature of financial markets. Concerns about ethical standards gave prominence to transparency. Markets that are transparent are likely to be less vulnerable to malpractice.

There are few markets that require the level of privacy, honesty, and trust between its participants. This creates a great obstacle for traders, investors, and institutions to overcome as there is a lack of transparency. With little to no transparency trader’s ability to verify transactions becomes virtually impossible. Without transparency there is no trust between the client and the broker.

Transparency needs to go global [13] : The fantastic growth of the Chinese economy has left the pundits wondering just how much more time it will need to regain the top spot. When looking at the power parity, analysts are expecting China to regain the crown as the top economy by 2015, after 125years of the U.S enjoying the Numero Uno spot. For China or any other economy to be a long-term hub for investment, disclosure and transparency will be necessary. A recent academic research discovered that investors are inclined to trade foreign equities more often than their domestic counterparts.

In short, markets which have weaker predictions or for market that have a lower disclosure standard have a higher level of trading for stocks. The portfolio turnover or churn rate was inversely proportional to the level of quality of information and level of familiarity.

In the wake of the recent financial crisis, investors look across the world for more in-depth information or investment products. For catering to this need, services are being offered to help investors find transparent managers and regulatory bodies are increasing the need for transparency within markets. As the investor seeks assurances regarding future investments, transparency will need to be maintained from the company level itself. A live example of this is Japan, where after two decades of poor returns, the Japanese investors are starting to challenge the management teams that are not contributing for the shareholders.

Hence, as the economic ties between the U.S, China, Japan, Europe, Brazil, India, and Russia, among others, continue to develop, international markets will need to increase transparency as investors continue to look for alternative investments and ways to diversify globally.

In India corruption should also be considered in every aspect of the investment and stock market. In the context of risk management, investors’ appropriate consideration must be given to the risks associated with corruption. Apart from financial loss, reputational damage is also a serious factor to be considered as a result of lack of transparency.

In recent times, there are two new arguments which favor transparent markets:

1. The idea that enhanced market transparency leads to greater liquidity,

2. The idea that a transparent market makes risk management much easier by supporting marking to market and VaR (value at risk) estimation [14] .

The equity market in India has made tremendous progress towards market transparency. The NSE's stock market based on anonymous, electronic order matching became India's largest stock market within a period of one year. Recently SEBI has taken a decision to forbid private transactions conducted over the telephone.

Risk rating agencies should consider transparency measures [15] as an integral part of their evaluation process. Tabs can be kept on corruption only by including anti-corruption programmes and transparency enhancing measures. Rating agencies that do not evaluate transparency in reporting should be considered as incomplete unreliable.

In summary, market transparency must be a central goal of policy in the area of financial markets; Reasons include ethics, fair play, enhanced liquidity, enhanced measurement and control of transactions costs, and improved risk management.

What Are The Risks [16] Involved In Stock Investing?

An investor should find the answers to the below questions, before contacting his/her broker:

1. Do you understand the risks involved in stock market investing?

2. Have you calculated the risk you can afford to take?

3. Are u choosing the stocks which are within your league and that match your measure of risk?

The various risks associated with stock market investing are:

1. Financial Risk

2. Interest Rate Risk

3. Market Risk

4. Inflation Risk

5. Political Risk

6. Emotional Risk

1. Financial Risk

The investor can lose money if the financials of the company are not performing. Hence, before choosing a company, do a detailed analysis of its financials.

2. Interest Rate Risk

Let us consider a scenario in which an investor goes for fixed deposit at 8%. Now in case the interest rate moves up to say 10%, then the investor stands to lose the extra 2% he/she gained.

Interest rates also affect the equity investment. How?? Companies borrow money from banks for capital expansion. Now when the lending rate rises, the company's profit is hit and this affects its shares.

3. Market Risk

When the entire market is declining, your stock will also most likely decline and affect your returns. The investment can be inclined to market instability in the short to medium term.

4. Inflation Risk

Inflation has a bigger impact in investments. One must always look for inflation adjusted return for true evaluation. If your investment gets you 9% per annum and if the inflation is 12%, then you lose your money and your investment is giving you negative returns.

5. Political Risk

Majority of the economic policies of a country is framed by the ruling government and hence it has a bigger say in market and hence your investments. The market mood is influenced by the political scenario in the country. The market will be in a nervous mood to know if the new government will be industry friendly or not.

6. Emotional Risk

Investors usually get into the trap of three emotions while investing:

Greed: to make maximum money in minimum time.

Fear: to enter markets when market is passing though a lean phase.

Love: They keep investing in a stock knowing very well that it is moving down just because they have a mad love for that particular stock.

In investment, intelligence and practicality must take precedence over emotions.

Insiders Job

This is a documentary made by Charles Ferguson related to the real cause as to why recession occurred. This period was known as the global financial crisis – 2008.

Global Financial Crises of 2008 actually began as early as 1980. The reason was due to the deregulation of the financial markets throughout the world. With this the risk taking increased enormously. This gave rise to many frauds and gambling. This gave growth to conflict of interest among people and sabotage was extensive.

It resulted in a massive decline of the financial stability. The government and financial institutes could not do anything to stop it because it was all done within the four walls. The deregulation of the financial sector was more related to freedom than discipline. The institutes saw profit rather than the consequence. As years went by, financial sector grew extremely well.

The main period for the recession to occur was 1991 to 2007; this time was referred as the Bubble. Because of the deregulation, a new method of mortgage lending was developed which allowed excessive gambling without any risk and personal profit yield was perceived. Securitization food chain, this was the system which was developed where the borrowers receive home loans from lenders with an intermediate between them being the insurance.

The loans given were mixed with debt and rating was given accordingly. The creditability of the company was obtained by the rating. Each company wanted to give loans by which they would get a transaction getting profit related to it. Hence increase in number of loans resulted in high supply of loans. The financial sector did not bother to see the future aspect but they made money at its current situation, which was an important aspect for them.

The time of crisis, sooner or later the out bursts occurs and hence it did during 2008. The debts were not being cleared, which resulted in bankruptcy of many companies. Banks were also under loss because of the situation. The government, at the time of crisis bailed out few huge firms but still millions of people were unemployed and inflation increased.

Since 2009, which is the era after the global financial crisis – financial sector were given restrictions and there were many rules which had to be followed by them. It should effect such that the history of the bubble does not repeat again.

Current Scenario of Our Financial Market:

To understand the current scenario of the bank crisis, let’s consider a real time situation,

You are a father to a son, who has just cleared the entrance exam for the country’s best engineering college. You are overjoyed with this but then you get the news that re-examination is being conducted, for the students who failed such that they pass this time. How disturbed will you be? Now if you get to know that the students who failed are politician’s children. Does this justify!

Coming to the real consequence, this is the similar situation for banks in Europe. A test called stress test is being conducted to bail out the banks which are under vulnerable. This is partial and ethically wrong. The countries are still somewhat managing to go ahead and maintain the business is because of us, the tax payers. As time goes on, this would not be sufficient.

These bubbles are being created and nothing much is being done to solve them hence it could result in another downfall of all the financial market throughout the world.

[ I HAVE SOME MORE FACTORS TO BE ADDED HERE]

My Stock Market View (Prediction) For 2013

I am not into predicting the future of stocks, either short term or long term. But I do sometimes share a few concerns when I see them. Even though I am a student currently, I have immensely invested plenty of my time analyzing the market and also looking at the effects of every element of the current scenario.

The reports I have read and understood in the past few months, most of them say we are out of the recession period and stepping into the period of growth. They say that 2013 is going to be better than 2012, but I beg to differ. It could lead into many conversations but I have my view and stand by it. In my view 2013 is going to be the same as 2012 if not worse!

Stock Prices on Medication

As I see the current stock market, I see it resembling to a drunkard who is high on an overdose of alcohol, meaning easy and cheap money. As of now it is climbing up in this drunken state but I am most certain that it will take a deep dive in the near future.

Since the year 2009, the financial markets have increased and trying their way out to get out of recession but this is not being possible, there are many reasons for this.

The Indian market impact is by foreign investors enormously, since major stakes of the investment in India is done by foreign investors. If the foreign markets are getting hampered this will affect the Indian market too.

It is important to understand as an investor that the world we live in is based on economic structures that are unsustainable. We are passing through a grand Ponzi scheme [17]