Introduction
There are many options available for investment. You can choose to put your money in government or private sector. Similarly you can also invest in properties like land and building or in bonds and other financi al instruments that yield interest.Your locality may have specific sources for micro cap investing money. Information pertaining to this can be had from the local market. If you wish to learn to invest money you must get to know the ways to invest money, and the place to invest money or where to invest money. You must be able to answer the following questions effectively:
- How to invest money
- Reasons to invest money
For Basic information about investments you can refer my article which is the first part of this series
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Investment Options / Sources of Investing
Here is an example to demonstrate the types of investments. Pretend you are going to start a lemonade stand.
You need some money to get your stand started. You ask your grandmother to lend you $100 and write this down on a piece of paper: "I owe you (IOU) $100, and I will pay you back in a year plus 5% interest." Your grandmother just bought a bond (IOU) by lending money to your "company" named Lemo. To get more money, you sell half of your company for $50 to your brother Tom. You put this transaction in writing: "Lemo will issue 100 shares of stock. Tom will buy 50 shares for $50." Tom has just bought 50% of the shares of stock from Lemo.
You sell $500 worth of lemonade. Business is good. Your costs for setting up the stand are $150, plus you pay yourself $100 for the hours you work. The company makes profits of $250.
After one year, from the $250 profits, you pay back your grandmother $100 plus $5 interest. You pay $20 to Tom and yourself, shareholders (a fancy name for owner). In business, the $20 paid to the owners is called a dividend. You decide to put the dividend money in the bank. Banking the money is a short-term investment.
This example covers three types of investments: short-term investments, bonds, and stocks. Besides these three, there are real estate (buying a house), commodities (gold and silver), collectibles (such as baseball cards), and mutual funds.
(A) Investment in Bank F.D.
FD: Opportunity for retirees to diversify their investment portfolio
Once you reach the retirement age, your investment options begin to shift into an entire new path. Earlier where maximizing returns may be of primary importance, stability in income is given the highest priority after retirement.
Although financial experts have been advising to have a significant prudent reserve for one's after retirement years but with a pre-set amount of funds, investment for old age from thirties and forties become difficult. At the same time it is also important that an assured and a regular income is coming your way subsequent to retirement and therefore investment is a must for retirees. However it is a complicated proposition.
Since retirees do not have any alternative sources of income like salary to rely upon, a stable income becomes the main motive of their investment. High risk-high return avenues typically take a back seat at this stage. So given such a constraint, there are only a limited range of options for the retirees.
Traditionally Senior Citizens Savings Scheme (SCSS) and Post Office Monthly Income Scheme (POIS) were one of the most common avenues in the portfolio of a retired person. Although there is a high range of safety attached to these schemes, cap on the upper investment limit makes them outdated. Even if they are safe and come under the methodical financial planning, one can enhance their financial portfolio by looking into a host of alternative long-range investment options including fixed deposits with monthly income plan.
(B) Investment in Gold
Reason to say NO to Gold :-
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- Gold doesn't pay income or interest.
- Since gold funds have made big moves over the past five years, it's time for them to drop back.
- Your broker probably won't recommend gold funds.
Reason to say YES to Gold
- Gold price appreciation makes up for lost interest, especially in a bull market.
- Central banks in several countries have stated their intent to increase their gold holdings instead of selling.
- All gold funds are in a long term uptrend with bullion, most recently setting new all-time highs.
- The trend of commodity prices to increase is relative to gold price increases.
- Worldwide gold production is not matching consumption. The price will go up with demand.
- Most gold consumption is done in India and China and their demand is increasing with their increase in national wealth.
- Several gold funds reached all-time highs in 2010 and are still trending upward.
Of all the precious metals, gold is the most popular as an investment. Investors generally buy gold as a hedge or safe haven against any economic, political, social, or fiat currency crises (including investment market declines, burgeoning national debt, currency failure, inflation, war and social unrest). The gold market is also subject to speculation as other commodities are, especially through the use of futures contracts and derivatives. The history of the gold standard, the role of gold reserves in central banking, gold's low correlation with other commodity prices, and its pricing in relation to fiat currencies during the financial crisis of 2007–2010, suggest that gold has features of being money - Source - Wikipedia
Is investing in Gold a Good Idea?
If you are thinking of returns or results in the short term then gold is probably not the right option. Investing in gold is no doubt a profitable option as it can be quickly converted to cash. It is a convenient as you can carry it easily wherever you go unless the quantity is very high. Since the performance of gold market s directly proportional to stock market it becomes easy to make calculations.
Factors that Influence Gold Price
Like any other resource the supply and demand constitutes to be an important factor in determining the price of gold. Since gold is a precious asset people even hoard it and its demand and price could increase drastically during inflation and even when there are wars. The price of gold shows an upward trend in most cases irrespective of the consequences due to the sentiment which people owe to the metal. They are prepared to pay any price for it.
Gold Investment Strategies
Some of the investors prefer to buy gold when the price increases because of the popular belief that it will increase further more and they can make profits by selling them thereafter. Other investors choose to buy gold when prices decline so that they can sell them at a higher profit when the prices increase. Another group of investors will make their decisions by testing if the current trend in pricing changes or not.- India, the world's largest market for gold that consumes around 700 tonnes of the metal a year, has traditionally been a market for jewellery, which is the most common gift during religious events and weddings in the country.
"The investment demand is more a function of disposable income as the overall savings of the country increases,"
The Indian economy is seeing a growth of about 8 percent and last year recorded a per capita income rise of more than 10 percent, according to government data. On an average, Indians save over 30 percent of their income.
The demand for 100 gram gold bars is quiet strong among investors seeking to lock away a part of their wealth.
You buy jewellery now, may be over 10 years that fashion would have changed. It is better to buy coins, bars and then convert it into jewellery.
India's gold demand surges during key Hindu festivals such as Dussera in October and Deepawali and Dhanteras in November. Dhanteras is India's single biggest gold buying day when people buy the metal to invoke prosperity.
(C) Investment in Real Estate
Real Estate Investment in India is one of most successful investment phenomenon in the last few decades. Real Estate industry in India has reached a culmination point ever since, the gates were opened to the foreign investors. This is the reason why many foreign investors are investing huge amounts of money in this sector.
The real estate developments in the country consist of the following:-
- Constructing houses
- Townships
- Residential complexes
- Office buildings
- Shopping malls
- IT parks
Indian real estate industry has huge prospects in sectors like commercial, housing, hospitality, retail, manufacturing, healthcare etc. Calculated realty demand for IT/ITES industry in 2010 is estimated at 150mn sq.ft. around the chief Indian cities. Termed as the "money making industry", realty sector of India promises annual profits of 30% to 100% through real estate investments.
(D) Stock
Stocks are shares in a company. When you invest in a company's stock or buy its shares, you own part of a company as demonstrated when Lemo sold half of its ownership or stocks to Tom. If the company makes money, your stock will increase in value. But, just as in short-term investment and bonds, there are pros and cons to stock investments.
Advantages
Stocks have a long historical track record of outperforming other investments, such as bank deposits, money-market funds, CDs, bonds, real estate, and commodities.
A stockholder or shareholder has voting rights that bondholders and bank depositors do not have.
Disadvantages
Stock prices often go up and down. They are never guranteed.
A shareholder may lose part or all of his money.
Conclusion-
With this we came to end of 2nd part of this series. I have tried to present this artice in a better way as suggested by Ankur Bhaiya in my previous article.
3rd part of this will deal with different terms related to Investments.
Your comments and suggestions are welcome.
Regards
Pulkit Gupta
pulkit_1988 @ rediffmail.com
CAclubindia
