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What is Stock ?
How do you begin investing into a stock market?
When is the best Time to invest in Stocks?
Why should I invest in Stocks?
Why Should in Invest in Stocks?
What is bond?
How do you begin investing into a Bond?
When is the Best time to Invest in Bonds?
What are the differences between the different bonds (5 yr., 10 yr., etc) ?
Why should I invest in Bonds ?
What is a Mutual Fund?
How do you begin investing into the Mutual Fund Market?
When should you invest in Mutual Funds ?
How do you choose a Mutual Fund ?
Why do you invest in Mutual Funds?
What are Forex investments ?
How do you trade in the Forex Market?
When should you buy currencies?
What markets are involved in forex trading?
Why do people invest in the Forex Market?
What types of saving accounts provide investment?
When should you invest in savings accounts?
Why invest in term deposit accounts ?
How do you choose the right savings accounts for investment?


Risk Vs. Rewards
Diversify :
Asset Allocation:
Modern Portfolio Theory



I). What is Stock ?

Stock is a small part of the ownership of a company. It is also called SHARE or EQUITY. You become the part owner by buying the stock. Being an owner you carry the complete risk. If the company becomes very profitable you gain. If the company sinks you lose your investment. The gain can be the increase in the value of the stock, which you can sell. It can be the income every year in the form of dividends distributed from the profits of the company. Being a small owner you have no control over the affairs of the company. You have only the right to be informed about the major decisions. You are invited to attend the general meetings of the shareholders. The majority at these meetings approves decisions. Your individual vote may be of little consequence. Many countries have regulations to protect small investors from being cheated. An individual shareholder can sue the management in case of fraud or mismanagement. In most countries the shares are issued in the electronic or dematerialized form. You do not have to keep any certificates. The depository keeps the shares in a safe custody. You enjoy all the rights. Over a period of time, the shares or stock yield the highest returns compared to other forms of investments. From Jan. 1926 to Dec. 1990, 1$ grew to 415 $ on an average in the USA. In case of the best companies 1$ invested gave the returns of 6,356 $ over the same period. What you get will depend on many factors. Even the best companies can have difficulties. Ford had one of the largest annual losses ($3,300 million in three years) during the early 80s. IBM nearly went bankrupt in 1914. Most recently Swiss Air had no money to fly, and could not even refund the customers for the tickets purchased.

Ideally you should invest in stock the amount you do not need, or which you are prepared to lose. The value of the stock will go up or down. This may not even have any relationship with the performance of the company. A stockholder has no guarantee or security for his investment. In case of liquidation of a company, all the employees, taxes, creditors and other dues have to be paid off first. The stockholder will generally get almost nothing. You cannot hold anyone responsible.

There are tax concessions in many countries in respect of income from dividends and gains from selling the stock at a higher price. The stock market is quite fascinating.

II). How do you begin investing into a stock market?

The stock can be bought in the primary or secondary market. When the company issues the stock for the first time ?also called PUBLIC ISSUE ?any one can subscribe to this issue. There may be some restrictions regarding the number, the mode of payment and place where the applications can be submitted. The company issues a PROSPECTUS- a detailed document giving complete information regarding the company including the time frame for the project, utilization of the funds, future prospects, risks perceived by the management etc. The prospective applicants are advised to study this document carefully. The public issue is kept open for a few days for enabling the persons to apply. After receiving all the applications the shares are issued within the stipulated time. The company may also invite applications in case of substantial expansion. But such public issues are few and far between. The other market is the secondary market. Huge transactions take place in this market every working day. Here the existing shareholders sell their shares to buyers. To purchase or sell shares in this market a person has to register himself with a broker or a broker house authorized to operate in this market The shares are quoted in a stock exchange and this information is widely available. The intimation to purchase or sell (quantity and price) has to be confirmed to the broker. Some brokerage has to be paid. After the necessary formalities, which may take at best a few days, the transaction is completed.

The shares are kept in a depository and the details are given to the account holder periodically. The advantage of the secondary market is that the past performance of the company is available for study. While investing in stocks it is necessary to remember that liquidity is low. Only funds not likely to be needed urgently should be invested. It is absolutely essential to study the background and the past performance of the company. The performance should be compared with the performance of the competitors. To minimize the risks, it is advisable to have diversified stocks.. You must devote time to study the trends and the market movement of stocks. Stock markets these days follow a global trend. Watch not only NYSE & NASDAQ but also FTSE, NIKKEI, HANG SENG as well as DAX and CAC. Stock market is the place to make tons of money. Even of you do not, you will never forget the experience.

III). When is the best Time to invest in Stocks?

It used to be believed that the best time to invest in a company is when it goes public. i.e. issues stock for the first time called initial public offer or I.P.O. The value is analyzed, the information is totally presented and there is a basis for the issue price. But there is only one snag. The performance of the unit, the skills of the management and the acceptability of the product in the market is totally unknown. Many technology stocks have slipped well below the issue price in a relatively short time. On the other hand the statistics and performance figures for the stocks quoted on the market are available. The most important being P/E i.e.. Profits divided by earnings. The best time to invest in stocks from the open market or secondary market should be when the stock is available at the lowest price, but again only future can decide whether the market was in fact the lowest. You can become wiser only after buying. It is also a fact that though the market i.e.. Dow Jones, Hang Sang or FTSE may go up or down, it will be very rare if all stocks go up or down together. You need to identify only the ones which are low priced today and likely (?) to go up in future. Sudden increase or decrease in price of stocks is called volatility. The longer that you invest in stocks the less will the volatility matter. The risks are that over a short period of usually two or three years and rarely more than five, the losses on holding shares can be substantial. The rewards are in the long-term, say 10 to 20 years. Hence looking at it from another angle,. the best time to invest is when you are not likely to need the funds that you are investing. For a proper investment decision you will need not only intellectual ability, technical skills (understanding balance sheets) but in addition right mental approach. Since future is always uncertain, many a time things will happen which are not anticipated. A balanced person will not panic, he will take the rough with the smooth and keep the long term approach. Therefore the first prerequisite before investing would be to assess your future needs and take a well reasoned decision regarding the amount you can afford to invest in stocks for a reasonably long period. An army of investment analysts and experts make constant efforts to sift every piece of investment information. This is available to almost everyone and this increases the market efficiency. So an investment into stocks can be made anytime. What would differ is which stocks to invest in. Very few investors have been able to achieve consistently a performance, which is better than market. This number is no more than the laws of chance would allow.

IV). Why should I invest in Stocks?

The stocks in the market are divided into certain categories. This is more for the purpose of analyzing the performance of a group of stocks. The categories may be technology shares, fast moving consumer goods, Automobiles, Steel, Aluminum, cosmetics, Drugs & pharmaceuticals, Hospitality, Air lines, Hospitals, Banking, Housing etc. These classifications can change over a period of time. In a dynamic world it can be assumed that different stocks can face different risks. If you have an investment in only one kind of stock or a number of stocks in the same market say airline the risk you face is much bigger when the air line industry faces problems after the attack on the WTC. On the other hand if you have some stocks in the pharma group it may not face any risks at all. In fact due to the possibility of biological warfare, it may do better. So if you invest in a diversified market your risks would be certainly less. But you must understand the meaning of RISK, The definition of risk is ?chance or possibility of a danger, loss or injury? We can reword this for investment purpose as ?chance that the actual outcome from an investment will differ from the expected outcome? Hence an investment in terms of risk can turn out to be bad or very good too! So when you buy stocks in several markets you reduce the risk. But you also sacrifice the chance of getting higher returns. Hence the decision to buy stocks in several different markets ?also called diversification - will naturally depend on your ability to take risks. If you are young, have good income and less liability you can afford to buy stock in only a few markets. If you are lucky you can win a lot of money. You can lose a lot too! But if you are retired and dependent on the income from the stock for your livelihood you cannot take the risk, You must invest in several markets. This will call for judgement. When the economy of a country is affected, all markets will be affected but not equally badly. In times of recession the first industry affected is capital goods industry. The last probably is drugs & pharmaceuticals. So depending on the guess of the future and your limited ability to take risks you must choose a judicial mix of stock in different markets. If you were to buy all the stock in the market in the right proportion the returns will match the market index. In such a situation you will perform as well or as badly as the market. But the purpose of the investment in stocks of your choice is to earn a better return than the market. Secondly it will not be possible for anyone to buy all the stock in the right proportion all the time. Hence with the limited funds and limited information available regarding the future movement of price of various stock you will take a decision to buy stock in different markets to match the degree of risk you can afford to take.

V). Why Should in Invest in Stocks?

The returns generated by stocks in most countries are not exceptional. The picture is similar around the world. The US common stocks on an average rose 4.2 times during 1989-99. In the U.K. the rise ending the 25 year period during 1999 was 36 fold. In Japan share values, ended 1999, are languishing over 50% below the peak in 1989. But they are still 5 times higher than what they were in 1974. A study conducted by an investment bank has shown that the average return on gilt edged security (Bonds) for 1974-94 (after adjusting for inflation and assuming no tax) was 5.7%.?In contrast, the corresponding figure for equities (stock) was 13.5%.? Equities represent the risk capital that is invested in projects to produce the best returns. Such capital can be, and is, reinvested elsewhere when there are better opportunities. This mobility may not be free. But risk capital will always be limited and the demand for it will always carry it to where returns are better.

But there are certain limitations when you invest in stocks. Apart from risks there is also the issue of liquidity. If you want the funds badly can you sell the stock easily, safely and without loss? This problem of liquidity is the issue. Since the stock market is volatile, the price could be very low at the precise time that you need the money. You have little option but to sell at a loss to get the money that you want. Such volatility may not exist in securities and Bond market because the interest payable is fixed and time period is also fixed. So it is said that the liquidity is good.

Some persons get a lot of thrill and excitement by the decisions to invest in stocks, watching the movement of prices, making money by selling stock when the gains are handsome and feeling a sense of achievement now and then. But along with investment in stocks goes a responsibility. It becomes necessary to watch not only movements of prices on national stock exchange but important exchanges world over. The stock markets these days are global, it becomes also imperative to watch the economy and performance of industries. Fortunately data are available but these must be analyzed understood and acted upon. The performance of individual management is important as even when an industry faces problems, some unit can show superlative performance and outstanding results. You may not become Warren Buffett or George Soros, but you can certainly become a much wiser person.



I). What is bond?

A bond is defined as a long-term promissory note with stipulated interest supported by a consideration or under seal secured by a mortgage. A bond has the promise of stipulated interest on a long-term basis. There is a guarantee for the performance. Bonds issued by the Governments are also termed as securities. The issuing Government or Federal/Central Government in case of issue by State Government or Local Authority guarantees the payment. Companies issue DEBENTURES. These may be secured by a charge on specific assets of the company. To ensure proper compliance of the regulations and proper upkeep & maintenance of the assets, a trust is formed or trusties are appointed. Even debt instruments issued by companies are covered under the broad term BOND for the purpose of investments. It is compulsory for such companies to get a ‘rating ?from the recognized Rating Agencies. This helps in estimating the repaying capacity of the company. Triple an i.e. AAA is the highest rating. The interest on a bond can be fixed for the entire period, or it can be floating. The floating rate will be linked to either the bank rate or some other independently determined rate such as LIBOR. In general, the safety of the investment and the regular income from the interest are assured. The market price of the bonds does not fluctuate widely on the market. This ensures liquidity. A bond- holder is a secured creditor. He has legal rights to sue the company in case of default. Bonds maintain a balance of safety, yield and liquidity. The returns in investments from bonds over a period of time are likely to be less than returns from stock market.

II). How do you begin investing into a Bond?

Basically bonds are debt instruments. They are stable forms of investments. The period of issue is generally 10 to 15 years. In some countries there are restrictions on investments in Government Securities by individuals. Sometimes minimum amounts to be invested are prescribed. In many countries individuals can invest in Government Securities in the same manner as stocks. These are quoted on the stock exchange and can be purchased in the same manner as stocks through brokers.

The investment in bonds can be through the primary market when they are first issued. The application has to be submitted as per the terms stipulated by the issuing authority. In case of companies debentures are now in the same category as stocks. The depositories keep the individual accounts.

In many countries the prime lending rates, or bank rates are being reduced over a period of time. This is a big opportunity for the bond market. The fluctuations in the bond market depend on these interest rates. Hence the volume of transactions on the bond market are very small compared to the stock market.

Transactions through the broker are possible on the PC. There are e-brokerage facilities available. You need to have a specified bank account and a specific depository account. The facility provider registers these. The transactions then can be carried out on your PC. The instructions are given on your PC to purchase or sell. The facility provider verifies your bank balance as well as your depository stock balance. As soon as the transaction is completed, your bank balance is debited in case of purchase or credited in case of sale. Simultaneously your depository balance is credited in case of purchase or debited in case of sale. This is not only quick but also safe.

Primarily you are buying bonds/debentures to balance your portfolio. At least part of your investment is safe. Bonds may have some special tax benefits as decided by Government. You can certainly sleep better with investments in Bonds.

III). When is the Best time to Invest in Bonds?

Bond market in general is not volatile. It is a liquid investment, which means that you can buy and sell bonds without appreciable loss. You can invest in bonds whenever you have the necessary funds available. Bonds pay a fixed and unchanging income with the expectation that their price will not be subject to wide fluctuation. The interesting point to note is that historically the interest rates moved from 4.5% in 1960 to near 10% in late 1980s. But the trend in the first few years of the twenty first century has been for the interest rates to fall. In US it is only 2%(Nov. 2001). This raises several interesting issues. If the expectation (today? is that the interest rates will go down in the next say 10 to 15 years, Bonds which give the guaranteed (today’s) interest for the next 10 to 15 years (depending on the maturity period) is a very good investment indeed. You are assured the higher rate of (today’s interest) over the next 10 to 15 years when the interest rates may go down. . This will increase the value of the Bond over the period depending on the fall in interest rate. But one can argue that these low rates can continue only for a limited period and as soon as the economy revives, the interest rates may be revised up wards. Under such a situation, the long term Bond may result in some losses. So even in case of Bonds the future course of events is important.

IV). What are the differences between the different bonds (5 yr., 10 yr., etc) ?

Investors have a fascination with potential rewards associated with investing in stocks or equities. There is

Consequently, a lack of interest in understanding Bonds, which are, fixed income securities. But several factors now contribute towards a renewed enthusiasm. First is the downward trend in interest rates. Second has been the slide in price of information technology stocks. Third is the effect of disasters such as terrorist attacks in the US. This has shifted the relative odds in the stock and bond market.

Governments, corporations and individuals issue debt instruments. They call for fixed periodic payments called interest and eventual repayment of the amount borrowed, called the principal. Bonds issued by federal, state and local governments differ in quality, yield and maturity. These are among the safest and most liquid securities available. Short-term government securities have maturity of one year or less. Treasury bills are offered weekly at a discount, with maturity of 10 to 30 years. Corporations engaged in industry or business offer private debt instruments. They range from high quality to defaulted securities. The subclasses mainly represent.modifications of the two basic promises interest and repayment of principal. Convertible bonds provide the holder with an option to exchange the bond for a predetermined number of stock at any time prior to maturity. Secured or mortgage bonds are secured by a specific lien against assets. During liquidation the creditors receive proceeds from the sale of those assets up to a limit of debt.

It is also obligatory in many countries for the debt instruments to be rated by a rating agency. The rating agency, after study of the finances of the company, gives a rating, which signifies the ability of the corporation to repay. These ratings are also revised from time to time depending on the change in the finances of the corporation.

The types and variations of bonds are substantial. You have to study the bond contract, which spells out all the details behind the issue. In general yield from the safest bonds i.e. Govt. bonds will be less than yield from private bonds. It is necessary to strike a proper balance depending on your specific needs.

V). Why should I invest in Bonds ?

Diversification is said to reduce risk. Govt. bonds- gilts in UK and treasury bonds in the United States are definitive risk free assets because the likelihood that the government will default on its obligations are effectively zero. Bonds or debentures and other securities in this category all have some assurance from the issuer to repay the capital and interest. Some assets may be specifically be mortgaged for the security. Independent rating agencies may have given a rating for the bond/debentures after fully analyzing the financial position of the issuer. Bonds have a long term and well-defined terms of interest payment and repayment of capital. This makes bonds less volatile. There is very little risk and good liquidity. Bonds can be traded in the market at relatively stable prices. This means that you can get the money by selling bonds whenever you need some money. You do not have to sell at a distress. Unlike stock, a legal liability has been created in your favor at the time of issuing the bonds. You have a legal remedy in case of default.

The consideration, therefore, for investment in bonds is liquidity. It is necessary for you to study your future needs in terms of cash. When you are likely to need? How much you are likely to need? What are the different ways in which you can get the amount?

Each case is different, the needs are different and the resultant mix of investments will also be different. Investors can spread the risks by not putting all their eggs in one basket. They can invest in different categories of investment including bonds to reduce losses due to future uncertainties. The future is going to be always unpredictable and different. Bonds help in containing these risks.


I). What is a Mutual Fund?

An individual investor who desires to invest in stock has limited money. On the other hand the different stocks being traded in the stock market are quite large. When an opportunity arises to purchase some stock, he may not have the liquid cash. He may not be able to study the trends in stock market. He may not be able to analyze the movement of prices in the stock market. It may be difficult for him to visualize the future prospects of different categories of industries, He may not be able to analyze the performance of individual companies and the changes in their management. In short very few persons can have the time, knowledge and skills to take the best advantage of opportunities that arise in the stock market. Mutual funds are basically investment companies, which continuously sell and buy stock. Any one can participate in its activities by investing in the mutual fund. The total capital available to a mutual fund is managed by the investment company usually a trust. All the stock owned, by this company valued at the market price is the net asset value or NAV. This amount divided by the shares will be the NAV per share. The Mutual Fund Company continuously sells the shares and redeems its shares. The Mutual Fund Company will buy the shares from the investor at his option at any time at the NAV. For managing the fund, the company will charge some commission called “load? This can be charged either at the time of selling or at the time of purchase. It can be seen that by investing in mutual fund one can get the advantage of large market and the expertise of the professional management. The company is watching the stock market all the time and trying to get the best yield for the investors.

Mutual funds state specific investment objectives in their prospectus. The main type or objectives are growth, balanced income, and industry specific funds. Growth funds possess diversified portfolios of common stocks in the hope of achieving large capital gain for the investors. The balanced funds generally hold a portfolio of stocks, and bonds. This achieves both capital gains and dividend along with interest income. Income funds concentrate heavily on high interest and high dividend yielding securities.

Industry specific funds invest in portfolios of selected industries. This appeals to investors who are extremely optimistic about the prospects for these few industries. One should be willing to assume the risks associated with such a concentration of investment. As it happened in information technology a bad performance can virtually result in huge losses. Sometimes the same company may have a family of mutual funds. The investor may be allowed to shift from a fund with one objective to a fund with a different objective for a fee.

II). How do you begin investing into the Mutual Fund Market?

There are a number of mutual fund companies. Each company has a family of mutual funds with different objectives such as growth, income, industry specific etc. One is tempted to invest in a mutual fund because of the professional services and expertise associated with the management of a mutual fund. To begin investing you can approach any of the mutual fund and by a very simple application, purchase the shares at the NAV. The NAV is available on a daily basis. The mutual fund will let you know the “load? i.e.?additional amount you have to pay when you buy and when you sell. In case of entire commission added to NAV at the time of purchase by the investor the process is called front-end loading. In case of entire commission being charged at the time of sale by the investor the process is called backend loading.

The mutual fund keeps on selling and purchasing stock in the market. Depending on the price of the stock the NAV will be changing. This will be quoted on a daily basis so that the investor can decide whether to buy more share or sell the total or some part of it. The mutual fund will also declare and pay dividend from time to time depending on the dividend income. The dividends declared on the stocks owned by the mutual fund will be the income of the mutual fund. The mutual fund will declare dividend and pay the same to the investors depending on its income.

There are a large number of mutual funds. Each will have a family of mutual funds with different objectives. Before investing, the prospectus of the mutual fund that specifies the condition should be studied. The past performance of the mutual fund can be examined. The comparison can be made with the stock market index. Over a period of time the mutual fund should do better than the index. (The index gives a measure of how the overall stocks have moved either up or down.) Such a study should include dividends declared by the mutual fund over a period of time. After investing the, performance of the mutual fund will be communicated to the investor. A comparison with performance of other mutual funds with the same objectives will help in understanding the subject.

There is no secondary market in the shares of a mutual fund. Investment in mutual fund is by buying new shares in the fund. Mutual funds pay no taxes on the income they receive. In order to qualify for the tax exempt status, funds must distribute most of the income they get (90% in U.S. and 100% after costs in U.K.) They must hold a diversified portfolio. In U.S. no more than 25% can be in a single investment. For half of the portfolio no more than 5% can be securities of a single issuer. These aspects severely limit the flexibility.

III). When should you invest in Mutual Funds ?

Mutual funds are a means to invest in a portfolio of stocks. Such an investment in different stocks may not be possible for an individual investor. Hence the best time to invest is when the NAV of the mutual fund is at the lowest. Lowest not only in relation to the past but also future. Actually it is only the future that is important. If one were confident or sure of future of any individual stock then it would be best to invest in that stock. The risk would be there but so would be the possibility of rewards. But many a time the future is not clear. The economic situation does not indicate any clear picture regarding the future. At such a juncture it would be advisable to invest in mutual fund. Mutual fund reduces risk because the investment is in a number of different stocks. Secondly it is also possible to select a mutual fund with an objective suited to your needs.

IV). How do you choose a Mutual Fund ?

Choosing a mutual fund is the most crucial aspect of investment in a mutual fund. In case of a stock it is easy to look at the past performance such as sales, profits, price on the stock market, dividends record etc. It is also possible to compare the performance with the other competitors. In case of mutual fund, firstly there are different families of Mutual Funds being managed by different companies. Secondly there are mutual funds with different objectives. Thirdly the past performance of a mutual fund may not be a good guide to future performance. One has to be very careful in evaluation. First aspect has to be trust. Is the management of the fund trustworthy??Are there any adverse or doubtful reports in the market? This is important because many a time a good performance could be a matter of chance. Secondly mutual funds are with different objectives. It is necessary to decide which objective is important for you. If one can take risks, growth objective may give better returns over a period of time. One should have the patience to wait for the long term, which may be necessary. Income funds may not give appreciation in capital but may assure income. If the need is regular income, then one has to invest in income fund. On the other hand there will a number of industry specific funds. Information technology, pharma sector, hotel & hospitality industry, processed food, fast moving, consumer goods, capital goods, automobiles, white goods, etc…etc.. All the industries cannot do better at the same time. The future of an industry will depend on many factors. An expert who can analyze these factors and make a good guess can certainly get good rewards.

There are many methods of evaluating the performance of the selected mutual fund. The purpose is to find if the management of a fund has done better through its selective buying and selling. One way is to compare the yield of a mutual fund with the market or a random portfolio. Even if the mutual fund has done better, the cost should be also taken into account/. It should be ensured that the excess return is sufficient to cover the added expenses incurred for the purchase of mutual fund. Lastly even after choosing a fund and investing, the performance must be watched.

V). Why do you invest in Mutual Funds?

Frequently, investors feel insecure in managing their own investment. They consider themselves inadequate to perform this task successfully. The investor feels that he lacks the education, background, time, foresight, resources and temperament to handle the portfolio. In such a case the choice is mutual fund. Managers trained in the ways of security analysis devote full time to the objective of the fund. This permits a constant monitoring. Secondly the mutual fund has large amounts of money entrusted to it. This makes it possible to diversify investments. The diversification will be as per the objectives. An average investor cannot achieve this. The mutual fund being a large institution, it may be able to obtain lower brokerage commission. Mutual funds pay no taxes on the income they receive. They do not pay taxes on the capital gains they realize. Investment in mutual fund mode is very simple. There is no secondary market in the shares of a mutual fund. Investment is by buying new shares in the fund. Investors can sell shares back to the fund. These transactions take place at the per share value of the fund. This is feasible because mutual funds mostly hold marketable securities. These trade on the recognized stock exchange. This gives mutual fund an important edge. The success of mutual funds in attracting capital to manage has been notable.

It should be remembered that historically there is very little statistical evidence to show that mutual funds have performed better. An analysis done in U.K. has found that very few funds have been able to beat the all share index or FTSE. The Securities and Exchange Commission in U.S. found some evidence that mutual funds outperformed the market by very small amounts. The same study found that there was no consistency with respect to which funds provided the investor with superior performance. What has to be remembered is that would an individual investor be able to do better. The confidence of investors in mutual funds and its growth seems to indicate otherwise. So if you think along the lines of the majority, you can choose mutual fund.



I). What are Forex investments ?

Each country has its own currency. Whenever one currency is exchanged with another it is a foreign exchange or forex transaction. The foreign exchange market has experienced many changes since its inception. For many years the United States and its allies participated in a system under the Bretton woods Agreement. The foreign exchange rates were tied to the amount of gold reserves belonging to the nation. However in the summer of 1971, President Nixon took the United States off the gold standard. After this many countries followed and there was no relation between the gold reserves and the exchange rates. Floating exchange rates materialized. Today supply and demand for a particular currency or its relative value, is the driving factor in determining exchange rates. The fall of communism and the dramatic growth of the Asian and Latin American economies have decreased obstacles and increased opportunities for investors in foreign exchange. Increasing trade and foreign investment have made the economies of all nations more and more interrelated. Economic figures are regularly reported around the world. Inflation, unemployment levels, unexpected news, such as natural disasters or political instability, alters the desirability of holding a particular currency. This influences the international supply and demand for that currency. The U.S. dollar, therefore, fluctuates constantly against currencies of the rest of the world.

Forex investments are investments in a currency other than that of your own country. If you have U.S. dollars your investment is in dollars. If you have British Pounds your investment is in Pounds. You desire to visit a foreign country. You know the approximate amount of money you will spend. You have the option of either taking your own currency to that country and exchanging the same when you visit that country . You also have the option of exchanging the currency in your own country and keeping the currency of the foreign country with you well before you visit that country. e.g. You are to visit Japan but you are at present in New York. You can change the U.S. dollars into Japanese Yen before you leave. This is a foreign exchange investment. You would do it if you think the Yen is going to become stronger. i.e. In future you will get less yen for dollars.

Forex investments are trading in future by options. An option gives you the right, but not an obligation, to buy or sell a specific amount or foreign exchange at a specified price within a specified period. Options are either call or put.?Calls give the holder the right to buy the foreign currency or Forex at a specified price. Puts give the right to sell Forex at a specified price. Depending on the actual market price when you exercise the option you will gain/lose the difference between the specified price and the market price.

II). How do you trade in the Forex Market?

Trading in the Forex market is through the brokerage houses that deal in foreign exchange. You can trade by options in Forex market.?The Forex market may be expected to go up or go down. If you expect the Forex market to go up you will go in for calls. e.g. The value of 1 us dollar today is 48 Indian Rupees. You are expecting that the Forex market will result in 1 us dollar equal to 55 Indian Rupees after say four months. You can go in for call option agreeing to buy 10 U.S. dollar at the rate of 50 Indian Rupees/dollar at any time during the next six months. Whenever the actual market price is above 50 you can exercise the option. If the actual market price is 54 Indian rupees you can exercise the call option. You can actually buy 10 U.S. dollar by paying only 50 Rs. per dollar i.e. by paying only 500 Rs. But the actual value being 540 Rs. The gain to you is Rs. 40. Similarly if you think the market is going to be 40 Rs./dollar you can go in for put option. Here you will be able to sell the dollars in Forex market at the agreed price ie. Rs. 48 Rs./dollar though the actual market price is less i.e. Only 40 Rs/dollar. The gain you make will depend on the actual difference in the market price and the options price. There would be some fee/commission required to be paid. This would be the cost of transaction and result in reduction of the gain to some extent. The foreign exchange market is the largest financial market in the world, Traditionally the foreign exchange market has only been available to banks, money managers, and large financial institutions. Over the years, these institutions, including the U.S. Federal Reserve Bank, have realized large gains via currency trading. This growing market is now linked to a worldwide network of currency dealers, including banks, central banks, brokers, and customers such as importers and exporters. Today the foreign exchange market offers opportunities for profit not only to banks and institutions, but to individual investors as well.

III). When should you buy currencies?

?/span>Holding currencies is no longer a practical proposition. Currency does not have an intrinsic value. It is just a paper, which is no longer linked to gold standard. Mostly you will enter into a contract which will give you an option to buy the foreign exchange (i.e. Foreign currency) at a rate which is agreed now. For example you know that you are likely to need a certain amount of foreign exchange at a future date. It may be to pay for imports or paying of commission or costs proposed to be incurred in foreign country.

If you expect the price of that currency to go up you can enter into a future contract to purchase the foreign exchange at the rate available for future trading. In some case even if you do not expect any change in foreign exchange rate you enter into a contract to save you from incurring higher costs in case the price goes up in future. So you can enter into foreign exchange contracts if you anticipate high volatility in the foreign exchange rates. Here you are only hoping to gain from such contracts, The time to enter into such contracts would be as soon as you become aware of any such future possibility of change in foreign exchange rate. An intelligent investor employs both fundamental and technical analysis prior to entering any trade. Fundamentals include watching the world news, and particularly studying variables that may cause the market price of a currency to fluctuate. Monetary and fiscal policy, political conditions, trade patterns, economic indicators, interest rates, inflation and unemployment figures are to be observed. Faith in a government’s ability to stand behind its currency also impacts currency price.

IV). What markets are involved in forex trading?

In today’s world there are a large number of currency markets. Trading in one currency vs. another is a market. Since there are many currencies, there are a large number of possible markets. But only some of these markets are active. i.e. There are large volumes of trading and the frequency of the trades is also high. These are the active markets. Most investors prefer a volatile market. Profits depend on changes in the market. Higher the changes, higher are the chances of large profits. In an actively traded market a large number of investors are operating. When you desire to trade, you need another trader who will buy when you sell and who will sell when you buy. This is easily possible in an actively traded market.

The Forex market is cash inter bank or inter dealer market. Forex market is not a market in a traditional sense. There is no centralized location for trading activity. Trading occurs over the telephone and through computer terminals at thousands of locations worldwide. The most often traded currencies, the major currencies are those of countries with stable governments and respected banks that target low inflation. Currencies that often trade with the U.S. dollar include Japanese Yen, British Pound, the Swiss franc and now the new European currency ?Euro. These are the most liquid. Countries suffering political instability or economic turmoil have currencies which are often tightly regulated and simply too illiquid. Forex is a continuous global market, providing participants with 24-hour market access. The only breaks in trading occur during a brief period over the weekend. The major dealer centers are that of Sydney, Tokyo, London and New York. Even though a 24-hour market the time of the day can have a direct impact on the liquidity available for trading a particular currency. The time zones therefore become important.

Technical analysis has grown dramatically in popularity in the foreign exchange market since the 1980s. Buying and selling opportunities are identified and tracked by computer charting, using trend lines, support and resistance levels, reversals and numerous patterns and analysis to study the behavior patterns of market crowds. Over long historical periods, currencies have displayed identifiable trends and patterns, which provide investors with profitable opportunities.

V). Why do people invest in the Forex Market?

People invest in forex markets because of the large opportunities they offer. They are very large markets involving trading of 1,500 billion $ every day. An individual investor can realize huge profit potential by buying or selling a particular currency against the U.S. dollar or any other major currency. Investor can generate profits whether a currency is rising or falling. Buying one currency (which is expected to rise) against another currency can do this. Or you may sell one currency (which is expected to fall) against another currency. Taking a long position means buying a currency at one price and aiming to sell it later at a higher price. A short position is one in which the investor sells a currency that he hopes will fall and aims to buy it back later at a lower price. Buying or selling currencies can also be in response to the economic or political events, which occur. These are called reactive responses. Buying or selling currencies on anticipation of rise or fall is a speculative response. Market participants anticipating the direction of currency prices generate the bulk of currency activity. In general, the value of currency vs. other currency (i.e. Exchange rate or foreign exchange rate) is a reflection of the condition of that country’s economy with respect to the other major economies. George Soros took a massive position against British Pound in 1992 and virtually forced the U.K. government out of the semi fixed exchange rate mechanism with its EU partners. He made a fortune out of this transaction. You can lose money also. The quantum fund set up by George Soros produced remarkable annual compound returns of 30% between 1969 and 1987. Depending on the risks that an investor is prepared to take the gains can be quite high. The style of George Soros was to take big, often interlinked speculative position using lots of leverage. It was possible to produce a 10% gain in the net worth of the fund that he was managing by means of only 1% favorable move in the YEN.



I). What types of saving accounts provide investment?

The idea of savings is somewhat similar to “Piggybank? A child does not know when and how much it can save.?Each saving amounts to almost no value. A nickel or a dime cannot buy anything. But nickels & dimes saved now and then over a period of long time can accumulate to dollars, which have some value. Typically a householder or a salaried person does not know how much he can save regularly. The demands can be quite irregular in terns of sickness, education or special obligations. But if the small amounts saved are kept in the form of cash, you may spend them. Secondly it cannot earn any interest. Rich people in any society or countries are limited. But there are a large number of middle income and even larger number of lower income groups. The idea of savings account was to have an account where small sums of money saved from time to time are deposited. Whenever needed you can withdraw the amounts also. But you will earn a small interest on the balance in your account. A large number of such accounts enable the bank to get funds at its disposal which it can lend. Normally at any one time only a few savings account holders will want to withdraw any money. This amount the bank keeps in terms of cash to meet will such demand. The bank knows such demand from its experience. So though each savings account may have small balance, a large number of such accounts are able to provide funds to the bank. Savings account provide the facility of security of the money. Some interest though small is paid. Whenever you have some amount you find extra the same can be deposited in the savings account. Thus savings account is an investment because you are able to get returns in the form of interest. There can be several types of savings accounts. e.g. Joint accounts in the name of husband & wife or a savings account in the name of a minor child who can deposit but not withdraw,? special savings account with certain facilities etc. It can be easily understood that savings account induces a person to save small amounts of money when possible. The investment generated as a result of such savings is available in times of need. But savings are investments only if the currency is stable and inflation is within limits. If the inflation is very high savings depreciate very rapidly. The purchasing power reduces and hence the savings do not remain good investments.

It is also possible that persons in the middle income group can have large balances in the savings accounts. The banks can then shift part of these investments to higher interest bearing deposits. Alternatively if the person having savings account does not have enough balance in his account but wishes to withdraw money for his use, the bank can allow this. The bank merely transfers the funds from higher interest investment to the savings account. Many facilities have become possible and simple with the computers and inter connection. Withdrawing money from savings bank account through ATMs have become very convenient. These ATMs are open for 24-hours. It is also possible to withdraw money from a different city to the one in which you have the account. The savings bank account has therefore provided not only the means of savings but also the security of money deposited as well as availability of the same at any time in any city. Sometimes these deposits up to a certain value are also insured against any eventuality including collapse of the bank.

II). When should you invest in savings accounts?

Saving bank accounts generally pay smaller interest. But you can get the amount back at any time without any advance notice or loss of interest.? Secondly other higher yielding investments require higher quantum of money. Hence when the amounts are small and you do not know how many times and how much you will save, it is best to put the money in the savings bank account. Many other investments carry the cost of commission, documentation or fee. In case of savings account the process is very simple. Similarly when you cannot anticipate when you will need the funds, savings account is a good option. The supposition is that the total amounts are small and you may need this in a hurry. Investment in savings bank account has two risks. One is the reliability of the bank. It has happened in quite a few countries. The banks have collapsed. Even in such a case the small investor is protected by some kind of insurance. You must make sure that the insurance cover is adequate for your balance. The other is inflation level in the country. If the inflation level is in twenties or thirties it is eating away into the value of your savings. Hence you have to think of other alternatives.

III). Why invest in term deposit accounts ?

Term?deposit accounts are essentially investment of your savings for a specified period. The term deposit is like investment in a bond. The bank agrees to give you a fixed rate of interest (or a floating rate which is very rare) on the term deposit for an agreed period of years. This rate is generally higher than the rate of interest in case of savings account. It is also higher for a longer period. The bank will pay higher interest if your term of deposit is 5 years instead of 2 years. The reason for this is that the banks can safely lend this money to a businessman for this long period. Theoretically you cannot ask for the return of this money before the term. In actual practice subject to some penalty, you can withdraw the term deposit before maturity in many cases. Hence if the amounts are large and you are fairly sure of not needing this for a long period, it makes sense to invest in term deposits. The term should be chosen with care so that you get the highest rate of interest possible and get the amount when you are likely to need it. So if you can spare the amount for a longer period it makes sense to invest the money in term deposits.

IV). How do you choose the right savings accounts for investment?

Savings bank accounts were quite simple. You could deposit the money any number of times. Depending on the rules the interest was paid on the minimum balance in the account. The interest was credited once in a year. But of late there is competition in the banking sector too. Secondly computerization in banking has made accounting faster. It is also now possible to give standing instructions to the bank regarding the operation of the savings account. This can help you in making some regular payments. Similarly ATMs have made withdrawal of money quite simple and possible at anytime.?So when choosing a savings account and the bank, you can look at the facilities being provided. A bank having total computerization can permit you to withdraw money from any city in the country. It is also helpful if the bank has branches in more cities and readily accessible from where you reside or work. The rate of interest will be generally the same but this should be verified. Some savings accounts may have the facility of automatic transfer of funds to a higher interest bearing term deposits, if the balance increases beyond a certain limit. In another case the funds in the higher interest bearing term deposits can be transferred to the savings bank, if you have issued cheques exceeding the balance. Some banks will accept instructions for regular payments for insurance, telephones, electricity bills etc. from the savings bank account. Similarly many banks will credit the dividends, annuity and such other payments directly to the savings account electronically. Hence to choose the right savings account the different facilities being offered by the banks and the convenience it will offer to you should be studied. In some cases even facilities proposed in near future should be taken into account while choosing the right savings account.




A). Private Companies :

Private companies have stocks, which are?not widely held. Basically these companies are?having stock, which is held either by a few individuals or their?friends, relations or individuals who are known to the promoters. Public companies have to invite subscription to stock by means of the issue of a prospectus. It has to give complete information in respect of their prospective activities, risks, anticipated sales, expected profits etc. The stock is permitted to be quoted on stock exchange.?Since the stock is quoted on the stock exchange, the management is required to make available all-important information which may affect the price of the stock on the market. They are required to publish the quarterly results in the newspapers. The basic idea is that since public at large is investing in public companies, no one should be able to take advantage of any inside information which is not available to the public. The information should be available to all. The private companies are not subject to such discipline . They cannot invite subscription from general public. This severely limits availability of large funds from public. Hence generally only those who know the management of the company or their promoters and can put their faith in them will want to invest in such companies. Stock in a private company cannot be sold in the stock exchange through a broker. The prices are not quoted. There may be conditions attached to the sale. The present promoters or management may have the first?right to buy the share. If they do not buy the same can be sold to someone else. But this is possible only if the present management agrees. They are thus investments with high risk. Secondly they may not be readily available. They are not traded. Hence it may be quite difficult to know the value of the stock. The liquidity is also limited. You may not be able to sell if you do not find a buyer who agrees to the conditions of the management. The person who invests in private companies must be able to know what is happening in the company by his own diligence. The management of a private company has a lot of freedom since they are not subject to the discipline of a public company. This may help then in achieving better results. The rewards will be shared by the investor. Over a period of time the present promoters may want to buy out the stock held by small investors.?They may be willing to pay quite a high price for this. Not many companies are now private and those who have stock in such successful companies may not want to sell. Hence the opportunity for investing in a private company are not always available. The trustworthiness and track record of the management, requires proper?scrutiny.

b). Private Funds :

Venture capital industry is a relatively small but growing sector of the investable capital market. Basically venture capital has emerged by wealthy persons who can pool their resources and create a large amount of private capital. Venture capital investments possess unique characteristics. First of all here the philosophy is long term investment. In case of a start up company i.e. a company, which is just starting, the investor must have the patience to wait till the seed become a mature fruit. It does take time to build and develop a new company. The investor must also realize that where a company will finally end up may turn out to be quite different from the end proposed. Companies frequently need to change products or at least modify the prototype if the product does not meet with the expectations,? The selection of the venture has to be proper. The idea should be right and outside conditions suitable. All the homework must be done thoroughly including time frame for each stage from concept to sales. The team, which will implement the project, should be cohesive and committed to the project. It should not depend on one individual. There should be enough cushions in the financial calculations so that a slight change does not sink the project.

In spite of all the precautions, all projects will not succeed. But a few that will succeed will do so well that the venture capital industry will still make above average returns. This is the force that is driving the venture capital industry.

The venture capitalists can either manage the fund themselves or more often hire professions who can manage the fund and day to day decisions. Only the venture capitalists or private fund owners will decide the policies. Either way success will depend on their ability to analyze economic trends for potential market opportunities. Careful screening and selection of teams who are capable of exploiting new opportunities is vital. . The exit strategy represents a plan for recouping the investment. Generally there are two main avenues. One is merely selling the company or selling the investment to other investors when the company is very successful. The other alternative is to go public i.e. make an IPO (initial public offer) and sell the shares in the company to a wide range of investors. Efficient financial markets, which seek out and fund important new technologies are necessary today. Without this, innovations and products would not have emerged with a speed, which could not have been imagined a few decades ago. The progress of a country may well depend on the availability of venture capital and its efficient use. Diversifying into a member of different companies and regional diversification can minimize risk. Another important diversification is investment in firms at various stages of development.

C). Incorporating?:

Any one who has money to invest can go into the business himself. There are many success stories of individuals going into the business and coming out to be highly successful. Bill Gates and Sam Walton may be good examples. What is not obvious is that for every one successful example there could be several examples of failures. Investment in stock is investment in business run by someone else. You have no control over what he does. But what he does affects your investment. Going in to the business for one’s self is risky. But every investment is risky. Being in control you should be if anything, able to do better. What does ensure business success? Today the business is highly competitive. Many persons are awed by the complex operations and decisions required to be made. Basically success in business requires a few key ingredients. You have to visualize the opportunity. You must have confidence in yourself. You should have a lot of patience to try and try again, if you do not succeed in the first attempt. Understanding the customer needs and satisfying them better at lower cost is also important. Ability to work with others and getting the best out of your employees are also skills worth having. You may not have all the qualities to start with but you must go on learning, acquiring new skills and developing qualities that you find are necessary. As you go along there will be difficult periods, trying times, adversity etc. But you must continue your efforts. If you lose heart, all others in the venture will be totally frustrated. Ups & downs will be there in every business. You have to be a source of encouragement for others. Even if you lose your investment, the skills that you develop and experience that you gain will be invaluable.

Another important factor in success is the ability to listen to others. Many successful businessmen are so confident that they stop listening to others. This is sure road to disaster. It is equally important to realize when mistake is made. The thing to do is admit the mistake and take corrective steps as soon as possible. It is true that when you are in business, all your eggs are in one basket and risks are quite large. But so can be the rewards. The decision would many a time depend on the mental attitude of the person rather than the risk reward equation.


An annuity is a fixed sum paid in perpetuity. It can be linked to an index but generally it is a fixed sum. When you are in employment, either you or your employer or both can invest in an annuity. A small amount is paid to the annuity provider till the age of retirement.. This amount, accumulated over the years, enables the annuity provider to pay a fixed sum (monthly, quarterly or yearly as agreed) to you till you live. This is a good retirement benefit. Annuity can also be purchased at any time by a single payment also. Depending on the single payment and terms of the annuity, the annuity provider will continue to pay the annuity till you live. In a way it is like pension.. The annuity payments are calculated taking into account the interest rates, life cycles, inflation etc.

Interest rates during the later part of 2001 are going down all over the world. But in most countries inflation is very much under control. Under such a situation a retired person with limited?liability desires to have a fixed income till be lives.? He can then manage his affairs well. In other forms of investment there is some uncertainty as to how much income he can get. Even in case of 15 years bonds, the interest that he will get after the 15-year period is over cannot be known in advance. If after 15 years the bank rate is low, he may get lower interest in new investment in bonds. In case of stock market the uncertainty is considerably more. In case of annuity, once he has made his purchase of annuity, his annuity payments will ensure the fixed income contracted for till he lives. He can live for another 5 years or another 30 years he will continue to get the payments. So for certain category of persons annuity payments are good investments. 

Some employees are allowed to invest some portion of the salary (agreed by him) in a portfolio. Here the annuity payments after retirement will depend on the success of the portfolio.?These are also therefore called variable annuity. There are certain tax benefits to the employees in such schemes.


Real estate has received attention in recent years as a compliment to stocks and bonds. Real estate is either land and/or building and is fixed in location. Each piece of real estate is unique because of the location. No two real estates are identical, The value of real estate also depends on how nearby properties are and the way they are utilized. The value also depends on local and economic conditions. A real estate cannot be moved. Hence location in an area of demand becomes very important. Real estates are durable goods having long economic life. Use of the property in?future has to be thought of. Properties usually involve large funds and are not divisible. Due to this the market for real estate is less efficient. For many large properties there are only a few buyers. Since the trading is not very often, the market price is difficult to establish. Information on price is not readily available as in case of stocks and bonds. It takes a long time to conclude a deal in real estate. Ownership of a real estate requires management of the property. Institutional investors would normally prefer a local partner to ensure expertise familiar with the local market. Real estate ownership also involves complicated legal procedures. Hence transaction costs are quite high, compared to other investments. 

One of the most important reasons for investing in real estate is hedge against inflation. Real estate is a very good investment in an inflationary climate. Including real estate in a portfolio imports diversification. It enhances the risk return characteristics. Investment in real estate results in tax benefits. The cost of real estate (less land) can be depreciated for tax purposes at a rate, higher than the actual decline in value of property. Taxable investors can use this to shelter other income.

There are many ways in which you can invest in real estate. Major types sought by investors are office buildings, industrial buildings, shopping centers, apartment buildings, hotels, motels and some specialty real estate such as restaurants. With direct investment the investor can obtain all or part of the real estate asset. The investor can manage the asset himself or delegate this to others for a fee. Indirectly the investment can be through an intermediary. They include REITs ( Real Estate Investment Trusts), public limited companies or syndicates. There are also debt investments in real estate. You can provide a part of debt capital in return for a claim on a part of income from the property. Such a claim would be secured by a lien on the property known as mortgage. This is the security for the investment. 

It can be seen that there are many ways in which you can make investment in real estate. You have to analyze your own requirements and needs and take an appropriate decision.


Investors know that there is a trade off between risk and return. When you seek a big reward, you have to be prepared for an eventuality when you may lose a substantial amount. You also know that one way of managing the risk is to diversity. This means you will buy a number of stocks. When the value of some stocks go down, some may go up.?Hence less risk. Recent years have been wonderful for investors. A consequence of this is that a whole generation of investors has grown up not knowing the effects of a collapse of the stock market. A bear market (when stock values are falling) gripped the Wall Street between 1937 and 1941. The market fell four years out of five. It lost 38% of its value. In UK in 1973 and 1974 shares fell 31% and 55% respectively. The Wall Street crash from 1929 to 1933 resulted in share values falling persistently for 3 years. When market bottomed out it was 87% below the peak of September 1929. Such knowledge can help in keeping a balance in times of adversity.

Some person may feel that you can safely invest in mutual funds because they have trained managers devoting full time for this activity. They have large amounts of money for diversification across industry and security types. A study conducted by Wharton school of finance and commerce in USA for Securities and Exchange Commission “found no relationship between the performance of mutual funds studied and the fees and charges that these funds levied? Michael C. Jensen after a study found that “the funds earned (net of expenses) about 1.1% less per year (compounded continuously) than they should have earned given their level of systematic risk?

On the other hand it may be quite difficult for an individual investor to find the time to study and analyze stock movements on the exchange, let alone study the performance of management of different companies. It is in this context that an investor can use professional investment counsel to advise him on investment policy. The investor can ask questions and discuss his objectives with the counsel. Such discussion can be quite invaluable in guiding the investor. Alternatively the entire management of the portfolio can be entrusted to such a professional. Many banks, financial institutions and brokerage houses are offering such services. This in effect creates a small mutual fund exclusively for the investor to meet with his individual needs. The range of services can vary considerably under this type of arrangement. Naturally the costs will also vary. The cost benefit analysis has to be attempted. The costs are likely to be high for a small investor. When the funds are sizable, the costs could be reasonable. Hiring the services of a professional to take complete control of your portfolio would rob you of the excitement and a sense of achievement. As is rightly said you cannot have the cake and eat it too!


1). Risk Vs. Rewards :

The dictionary defines risk as the “chance or possibility of a danger, loss or injury? For investment purposes, this can be translated as “the chance that the actual outcome from an investment will differ from the expected outcome? Here different can be different positively or different negatively. Even if an outcome of investment turns out to be better than your expectation, it is still different. Hence, it is risky. The price of an investment will always go up and down. The movement in the price of an investment is the risk. A large movement is high risk. A little movement is little risk. Now it is easy to understand the risk reward relationship. A stock whose prices can go up or down by a large margin can go up by a large amount or go down by a large amount. You are holding this stock. If the prices go up by a large amount you have reaped a high reward. You can sell the stock and gain the value of difference. But if the price of the stock goes down, it may go down by a large amount because this stock is subject to high fluctuations. Now even if you do not sell the stock the value has already gone down by a large amount. You have lost the amount of difference. On the other hand if you hold a stock which hardly ever goes up or down, you have no risk. But there is not going to be any reward either. So either you have to take high risk with a possibility of big reward (and equally good possibility of losing a substantial amount) or be satisfied with no risk no reward at the other extreme. So it is easy to understand the risk reward relationship. Your purpose of investing is two fold.. To get some regular income and also if possible increase the value of your investment. It has been seen that over a long period -say more than 10 to 15 years- there has always been good returns from the stock. As the investment horizon lengthens even unlucky investors are able to move into profit zone. Secondly the gap between the best possible and worst possible returns narrows and stabilizes. Satisfactory investment returns are available for all equity investors who are prepared to wait. In most cases these returns are substantially better than those produced by other investments such as bonds. An investment bank has shown that the average rate of return on U.K. govt. bonds for 1974 to 1994 (after adjusting for inflation) was 5.7% per year. The corresponding figure for equities was 13.5%. This is likely to be in future also. Equities represent the risk capital that is invested in projects to produce the best return. Such capital can be, and is, reinvested elsewhere when better opportunities open up. Risk capital is always limited. The demand for it will always ensure that it finds its use where the returns are higher. It is therefore reasonable to argue that there is no reason to fear investment in equities in a diversified portfolio. It is only necessary to follow sound investment principles.

II). Diversify :

?/span>Diversification is one way to reduce risk. The investor desires to get rewards but he also wants that under no circumstances should he lose substantially. Many different ways are possible. One traditional approach is to have a large number of securities in the portfolio. But it should be kept in mind that mere number might be less important than the kind of securities. The stock market consists of stocks which have high fluctuation called volatile and those which move in a narrow range called stable. Logically it may make sense to have a balance of both. This would be diversification. But even here those who want high rewards and can take higher risk may keep more of the volatile stocks. Those who want to take less risk may keep more of stable stocks. Again there are many industry types. All industries may not do badly (or do very well) at the same time. It may have interdependence. Some may be related in such a way that when one does well the other will not do well. Better health and well being may be good for travel & hotel industry. But may be less welcome to the pharma industry. If you have stocks of both, one may compensate for the other in case of violent fluctuations. Similarly the movements in stocks of small companies may differ from the movement of stocks in large companies. A small individual investor cannot just invest in a large number of stocks for the purpose of diversification. He must therefore select the few varieties of stocks carefully so that all of them will not go up or down together and all of them will not have volatile movements at the same time. The risks can never be reduced to zero in portfolio of any size. Diversification also means investments in other assets. The most important for diversification are bonds. Bonds give an assured income over a long period. There is a security for the payment of interest and capital. In case of Govt. bonds there is no risk at all. Some investment in bonds would also reduce the risk for a part of the investment. Diversification can also be achieved by investing in real estate. This can give a good hedge against inflation. You could also invest in mutual fund. Mutual funds are available with various objectives. Mutual funds could be diversified stock portfolios, income funds or even balanced funds that invest in both stocks & bonds. So it is possible to select a mutual fund which can match with your desired kind of diversification.

III). Asset Allocation :

?You have some money and you want to invest. The basic purpose of investing is to see if you could earn more from this amount and turn it into a substantial amount by taking some risks. Some persons may invest only for the thrill of the experience. The stimulus provided by pitting your brains can be quite exciting in a battle on the stock market. The investors are all competing in the stock market. The score card is the index. Winners are there for everyone to notice. Such investors do not need the income or the appreciation of capital. They are looking for the fun, the excitement and the joy of getting noticed. They can do what they like and need not go into the asset allocation question.

For a large numbers of investors the reason for investing is more practical. They need certain income from the investment regularly. They would like to build a reserve of capital for the future needs. This resolve of capital can be turned into cash when needed in future for various needs. These needs may not be known precisely today but some estimates can be worked out. The first step therefore is to work out the present and future needs. How much regular income do you need today? Will this requirement increase or decrease in future and by how much? How much capital may be needed in future-may be to buy a house, expansion of business, sickness, etc. For working out these figures you will have to remember that a dollar today is not worth a dollar after five years. If you can buy something for a dollar today, you may or may not be able to buy the same thing for a dollar after say 5 years. This is due to inflation. Inflation erodes the value of money. So you have to take into account the rate of inflation. The higher the rate of inflation, the bigger the amount of money that you have to provide in future for the same need. Many of these questions may not have exact answers. You will have to assume the future rate of inflation. You will have to estimate broadly your needs. Once these are identified, you can progress to the next step. How can I plan my investment to meet these needs. Surely it is easier to work out such an exercise if the approximate requirements are known. Such targets are easier to achieve if the returns expected are lower and the time required for? achieving them is longer. If the time frame is short the person has to remember that he has to be very cautious. He cannot afford the shocks that the stock market may deal. On the other hand if the time horizon over which you are expected to achieve the results is long you can afford to be more risk inclined. This is because even if there are adverse situations, you have plenty of time for the period when fortune is sure to smile.

The assets can now be allocated to different avenues of investment available. The most obvious is a stock. Here you can either diversify yourself or opt for a mutual fund. Specialists like engineers, doctors, pharmacists, etc. may like to hold more stock in the industry where they know the ins and outs. They may be able to spot a good bargain as well as be able to spot the clouds on the horizon. Similarly if inflation is a problem and likely hood of high inflation looms large, investment in real estate may provide part of the answer. Present regular income can be assured through bonds or mutual fund, which ensure regular income. Another way to achieve the same objective would be to purchase annuities. Some amount in savings account and/or term deposit accounts meets the requirement of immediate liquid cash on a day to day basis. Those who have some understanding of the subject can take on the opportunities in forex market. 

You can see that each investment portfolio has to be unique to meet your own needs. You must also watch if there is a need to make changes in the asset allocation depending on the change in your needs or the changes in environment. Their guidelines are of course generalizations. Everyone has different needs and must devise has own plan to meet them.

IV). Modern Portfolio Theory :

Securities have returns and risk characteristics. When these are combined it makes a portfolio. The risk and return characteristics of each security being different, it is necessary to consider the effect of blending these. This is called portfolio analysis. The purpose of the analysis is to ensure that the portfolio suits the risk-return pattern desired by the investor. Portfolio selection is a continuous process by which the existing portfolio is analyzed and choice is made to add or delete securities in order to match its performance more and more closely with the objectives of the investor.

Investor knows that there is a relation between risk and returns (i.e. if they are desirous of bigger rewards, they should be prepared to take greater risks.) Diversification reduces the risk. This is because when the value of some securities go down, some may go up. But as you go on reducing risks, the possibility of rewards automatically goes down. The purpose of the portfolio theory is to work out a formula, which helps in explaining how and why this happens. Once this is understood it may be possible to make predictions for expected returns. Harry Markovitz prepared the most popular theory in the early fifties. He defined risk as the variability of returns from the average. He concluded that the risk was not merely the weighted average risk of the contents of a portfolio. It could be reduced by means of diversification. On the other hand the returns from the portfolio must always be the return on the components. This takes us to a conclusion that it is necessary to diversify in a particular way. Mere diversification is not enough. It is possible to work out the contents of an efficient portfolio. This will produce the maximum returns for the level of risk accepted by the investor. He worked this out by examining the movement of every pair of investments in a portfolio. Such an analysis requires considerable amount of work. But it was found that when one stock market is taken for analysis, the stocks generally moved up or down in relation to the whole market. It was not necessary to examine the interrelationship between pairs. This resulted in single index model being used. But if the portfolio was to be worked out involving many different stock markets across the world, it would be necessary to use the full Markovitz model.

          ?There is also psychology of risk aversion. An important finding of psychologists is that people do not react consistently when faced with risk. Many investors are uncomfortable due to stress and anxiety caused by deciding about investments. The dis-proportionality of people’s tolerance for losses, as compared to the pleasure of gains, can lead to inefficiencies in the stock market. Investors tend to overpay for the prospect of big rewards (oil find, new drug, hit film) while they systematically overvalue possible calamities. Traditionally portfolio selection has been viewed as an art form. But recently the theoretical approach is gaining ground. Another simple portfolio selection process involves the use of risk penalty. The risk penalty is the loss one may have to consider from the expected return to compare the various investments.

Risk Penalty     =       ?Risk Squared?/Risk Tolerance

Risk squared is the variance of the return of the portfolio. Risk tolerance is a number from 1 to 100 which indicates the investors willingness to take risk.

Such analysis helps in making a decision. But it must be remembered that the results are dependent on the input data and outcomes can be quite sensitive depending on data which cannot be very exact and keep on varying.

Another important issue is that it is necessary to constantly revise the existing portfolio. This has to reflect the changes in objectives as well as the changes in the market, prices, risks and environment.

This is not a treatise on security, investment or portfolio analysis. It merely acquaints the investor with the basic fundamentals. It can help him in selecting expert guidance and understanding reports, literature and published material on the subject. No risk is assumed nor understood to have been taken by the web-site against possible loss due to misunderstanding or inadequateness of the subject treatment. All actions taken by an investor are fully, totally and entirely at their own risk.



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