INTEREST
Interest, usually expressed in terms of a percentage, is the additional amount you pay for using borrowed money or the return you get when you invest it with an institution like a bank.Its also the compensation you can demand if someone delays a payment that’s due to you. If you think clearly, the two concepts we discussed earlier viz, time value of money and compounding were based on the concept of interest rates.In this post we are discussing certain practical scenarios where interest rates can baffle you. It’s discussed under two heads
1. Interest payments
2. Interest incomes.
INTEREST ON LOANS
Interest rates are always tricky.  In most of the cases, interest rates advertised by the banks are not the actual rate of interest you pay. It’s something more than that.
Trap 1.
When you apply for a loan, there are a lot of financial charges you need to consider before deciding whether to avail it or not. For example – you are offered a loan for Rs.2 lakhs and your EMI works out to say, Rs. 18000 with 2 EMI’s payable in advance. Effectively, you are getting only Rs 164,000 in hand. But since the interest rate is calculated as if the entire 2 lakhs is given to you, the rate of interest you pay is actually very high.
Is that all? No. The bank will also deduct a processing fee of 1 % of the ‘total amount’ ie. Rs 2000 for a 2 lakhs loan. So on net, you get Rs 162,000.
Trap 2.
You are offered the same loan for reducing balance interest. You feel light thinking of the fact that interest is charged only on the balance outstanding. But look closer – reducing balance can be on monthly basis, half yearly basis or on Annual basis. If it’s on annual basis – your interest is calculated on the amount outstanding at the ‘beginning’ of the year. So, you keep paying interest on a higher amount even though your loan is decreasing every month. This pushes up the effective rate of interest you pay.So always confirm whether the reducing balance is on annual basis or half yearly basis.
Trap3.
Higher loan pre-closure charges. The bank would like you to pay your EMI’s regularly. If you do that, the bank likes you so much that on the basis of that regular loan track, they will sanction a second loan if you want. But – if you try to close off your loan liability before the stipulated loan period – the bank will charge an additional amount of 3% to 4% on the outstanding principal. They don’t want their customers to be ‘Too regular’. strange isn’t it?. That’s the way bank deals with it’s customers. If you try to be too good , you’ll be fined This preclosure charge you pay effectively raises the cost of your loan.
The solution-
The best way to deal with these traps is to stop comparing the interest rates and instead, compare the EMI’s and compute the total amount going out of your pocket including processing fee and pre-closure charges. This will give you the right picture of which loan is actually right for you.
INTEREST INCOME
The principle to be applied is quite simple – The earlier you get it, the better it is.
This principle will help you to compare different offers. For example – A bank offers 8% P.a  interest on FD , payable annually. NSC also offers 8% P.a but, payable half yearly. You get another offer on FD which pays interest at 8% p.a – payable monthly. Which is better? The one you get on monthly basis, of course!. Why? Because, the bank’s effective rate is 8% , the NSC’s effective rate is 8.16% and the third option of FD gives you an effective annual interest rate of 8.30% !
How? Let’s calculate with an example –

• Let’s assume that you have 2 lakhs with you.
• The first bank would give you 8% – annually so, you receive an interest income of Rs.16,000 at the end of one year.
• Suppose you depoited the same with NSCThey would give you  8% -half yearly. So, at the end of 6 months you get Rs 8,000 which can be again invested for 8% interest for 6 months whch gives you an additional interest of Rs. 340. So, the total interest you receive is now Rs 16,340. effective rate – 8.16%
• Similarly , when you work out 8% interest received on a monthly basis the effective interest rate would workout to 8.30%
• You may like these posts:
  
  Financial Discipline for all:: Principle 1.Finding money
  Financial Discipline for all :: Principle 2.Time value of money
  Financial Discipline for all : Principle 3. Compounding

   
   
   

When asked to name the greatest mathematical discovery, Albert Einstein, one of the most influential and best known scientist and intellectual of all time replied – “compound interest”.

Let’s try to understand why he said so with a very simple example:

• Jerry starts saving when he turned 25 and invests Rs 50,000 every year. He earns a return of 10% every year.At the end of ten years; he has been able to accumulate Rs 8.77 lakh. After that, he dosen’t invest Rs 50,000 anymore. He leaves that investment there until he’s retires at 60. At that time,  he would have accumulated around Rs 95 lakhs .
• Tom, had fun and lived his first few years spending on all kinds of things and did not think of investing regularly. At 35, he starts to invest Rs 50,000 regularly every year until he retires at 60. I.e. for 25 years. But, he would have managed to accumulate only Rs 54.1 lakhs which is around Rs 41 lakhs less in comparison to Jerry.

5 simple points spell out from this story:

• Even by investing two-and-a-half times more than Jerry,Tom has managed to build a corpus which is 43% less!
• Why? Because,Jerry’s Rs 5 lakhs was allowed to compound for a longer period of time than Tom’s.
• As the fund grows, the impact of compounding is greater.Jerry starts at 25, accumulates 50,000 for ten years, stops at 35 and then, his 8.77 lakhs (5 lakhs + Interest) is allowed to compound for 25 years till he’s 60. Whereas Tom starts at 35 and invests Rs 50,000 for the next 25 years, accumulates 12.5 lakhs (50,000 x 25) only to get 54.1 lakhs at 60.
• Now let’s assume that Jerry had allowed the fund to compound for only 20 years i.e.  Till he turned 55. At 10% return every year, he would have accumulated an amount of around Rs 59 lakhs. By choosing to let his investment run for 5 more years, he accumulates Rs 45 lakh more.
• Essentially, compounding is the idea that you can make money on the money you’ve already earned.

Compounding is very powerful.As Napoleon hill has said- “make your money work hard for you, and you will not have to work so hard for it” To take advantage of it, you have to start investing as early as possible.The earlier you start, the better it gets.
Easily said ! isn’t it?
I know it generally doesn’t work as i said. Because at 25, most of you haven’t drawn a plan to invest 50,000 a year. Even if you’ve done it , somewhere down the way , you’ve missed to add to your corpus regularly year after year. And , due to some emergency that crept in, you took back some amount from the corpus and din’t let your money grow !
So , how can a regular person use it to his/her advantage? Always remember to reinvest interest or dividends received on your investments. Over a period of time, such small amounts will add up to a tidy sum.
FREQUENCY FACTOR IN COMPOUNDING
The frequency of compounding is a major factor that that influences the compounding effect. The shorter the compounding frequency, the earlier your interest is re-invested and thus you earn more interest and your money grows faster.
Here’s more examples:

• Savings of Rs 2500/- per month (Rs.30000 Per year) with 15% return will be worth Rs. 15028707/- (1.5 Crores) after 30 years. Yes, this is not typing error. It will be worth Really 1.5 Crores.
• Savings of Rs 2500/- per month (Rs.30000 per Year) with 15% return will be worth Rs. 30400370/- (3.04 Crore) after 35 years.

COMPARATIVE CHART.
Here is a comparative chart for you to understand.
Let’s assume that you invest Rs 10,000 annually. Your retirement age is 60. Let’s also assume that the interest rate you get is 10%.
At the age of 60 you will have -

• 49 lakhs -if you had started investing from age 20.
• 30 lakhs -if you had started investing from age 25.
• 18 lakhs – if you had started investing from age 30.
• 11 lakhs – if you had started investing from age 35.
• Just 6 lakhs – If you start at 40!! Take note of the impact.

Oh! That’s a huge difference! Now that you realized it late, what can you do? You can start now, invest more and reach the target of 49 lakh at age 60. This would mean more hard work and budgeting for you.   Let us see how much more you would need.
To get 49 lakhs at age 60 –

• Invest 10,000 annually – at age 20
• Invest 16,500 annually – at age 25
• Invest 27000 annually – at age 30
• Invest 45,000 annually- at age 35
• Invest 78,000 annually – at age 40!!

Generally what I find is that most of the Indians start thinking of saving and investing at the age of 30-35. The above calculation is made assuming that the interest rate you get is 10 percent. But the average interest rate of banks is less than that. I hope the picture is now clear for you. The more you delay, the more you need to invest.

Hope you have understood the concept of compounding and how it impacts your savings. That’s principle 3 for you.
You may like these posts:

The best money advice anyone can ever give you is the “time value of money” concept . It is a vital concept in finance. Every financial decision involves the application of this concept directly or indirectly.The calculation of time value involves simple mathematics and it’s easy to calculate. Since this topic is a very important to everyone, we put it down as principle number two.

ENTER-TIME VALUE OF MONEY

The principle is – Rs 100 today is more valuable than Rs 100 a year from now. The reasons for this is quite simple to understand -

• First, since the cost of living goes up , your money will  buy less goods and services in the future .So, today, money has more value or the purchasing power of your money is more
• Second, if you have that money today, you can invest and earn returns.When you receive the money at a future date instead of receiving it today, you lose the interest or profit you would have made, had this money been with you now
• Third, you prefer to have money today since the future is uncertain.

EXAMPLE :

Lets’s assume that you are  25 years old. You have Rs.2500 with you now. You  can either put it in bank FD or buy yourself a new dress. Now, let me further assume that you opt for buying new dress.The reality is that you are spending far more than that Rs 2500. How? Let’s try to calculate the real cost of not investing that money.
FV = pmt (1+i)n
FV = Future Value
Pmt = Payment
I = Rate of return you expect to earn
N = Number of years

HOW TO SOLVE THE EQUATION?

N = Number of years invested - The money you’ve spend on a dress is lost forever. That means,  that  Rs 2500 could have compounded in the bank for atleast 35 years.  How did i get that ’35′ figure? I assumed that you’ll retire at 60 and since you are 25 now, there’s 35  years left. let’s substitute 35 for “n” in the equation.
I= Rate of return expected – The ‘I’ in the formula stands for the expected rate of return. Since  bank fixed deposits would pay around 8% and   stock markets have returned an average of 15 %- 17% ,  Let’s assume you would earn some where in between – an average of 10% rate of return. So, we’ll assume  ’I’ as 10% .

PMT –  is the value of the single amount you want to invest (in this case Rs 2500).
Now substituting the figures, our   formula would be –  FV = 2500 (1+.10)35.
Enter 1.10 into your calculator (this is the sum of 1+.10). Raise this to the 35th power. The result is 28.1024. Multiply the 28.1024 by the pmt of Rs 2500. The result (Rs 70,256 ) is the true cost of spending the Rs 2500 today (if you adjusted the Rs 70256  for inflation of 6 % , it would probably work out to about Rs 9150  That means your real purchasing power would increase approximately 4 fold).
Now,  after realizing the actual cost of spending Rs 2500,   would you prefer to buy a dress for Rs 2500 today or Rs 9150 in the future. The answer is entirely personal.
Once you understand this vital concept,  you would realize that all those bits and pieces of money you spend unnecessarily are costing you thousands in future wealth. This is why time value of money is considered as the central concept in finance.

MORE EXAMPLES..

Future value of money –compounded annually.
You deposit Rs 50,000 for 5 years at 5% interest rate compounded annually. What is the future vale?

• FV= PV ( 1 + i ) ^N
• FV= Rs. 50,000  ( 1+ .05 ) ⁵
• FV= Rs. 50,000  (1.2762815)
• FV= Rs. 63,815.

Future Value of money – Compounded Monthly
You deposit Rs 50,000 for 5 years at 5% interest rate compounded monthly. What is the future value?
(i equals .05 divided by 12, because there are 12 months per year. So 0.05/12=.004166, so i=.004166)

• FV= PV ( 1 + i ) ^N
• FV= Rs. 50,000 ( 1+ .004166 ) ⁶⁰
• FV= Rs. 50,000 (1.283307)
• FV= Rs. 64,165.

GOING BACKWARDS.

Present Value of money – Compounded Annually
You will receive Rs 50,000 5 years from now.  How much money should you get now instead of Rs 50,000 5 years later if the interest rate is 6%?

• (i=.06)
• Rs.50,000 = PV ( 1 + .06) ⁵
• Rs.50,000 = PV (1.338)
• Rs.50,000 / 1.338 = PV
• Rs. 37,370.

Present Value of money – Compounded Monthly

You will receive Rs 50,000 5 years from now.  How much money should you get now instead of Rs 50,000 5 years later if the interest rate is 6% calculated on monthly compounding basis?

• Here , (i equals .06 divided by 12, because there are 12 months per year so 0.06/12=.005 so i=.005)
• FV= PV ( 1 + i ) ^N
• Rs.50,000 = PV ( 1 + .005) ⁶⁰
• Rs.50,000 = PV (1.348)
• Rs.50,000 / 1.348= PV
• Rs. 37,091.

KNOW IT

• A rupee received today is greater than a rupee received tomorrow because money has ‘time value’
• The time value of money is the compensation for postponement of consumption of money. It is the aggregate of inflation rate, the real rate of return on risk free investment and the risk premium.
• ‘Time value of money’ can be different for different people because each has a different desired compensation for postponing the consumption of money.

That’s interesting! This is one topic everyone will read very carefully because it all about finding money! Imagine that you found Rs 1000 between the pages of an old book on the shelf. You kept it some months back and forgot about it. How does it feel? Even if that money was never found, you would have still lived with what’s left in your wallet without even bothering where it disappeared. isn’t it?
This is the principle behind accumulating savings from your income. Set aside your target savings and forget about it as if it were not there and live with the rest. It’s not easy as you think,but definitely not impossible. And , it’s never too late to apply this principle !

To most of us Savings = Income (or salary)- Expenses . However, this formula doesn’t work ( as you would have already experienced ) since when money is in your pocket, you get trapped by advertising tricks like discount offers on Clothes or new gadgets which tempts you to spend more. It’s difficult to control expenses. As a result, your savings never hits the target. If what we said holds true for you and you seriously want to save a fixed 10% or 20% of your take home salary each month, you need a different approach to savings. We suggest Robert Kiyosaki’s method from his famous book ‘Rich Dad Poor Dad’.
What kiyosaki said is very simple. Instead of trying to limit your expenses every month, first deduct an amount which you intend to save and keep it in a separate account so that you live with only what’s left. So our formula has to be modified like this :

INCOME – SAVINGS(INVESTING FUND) = EXPENSES

Smart ! isnt’ it ? This formula forces you to “pay yourself first,” before the other expenses. That way you know your savings will not get lost in the daily grind of living expenses.
The other side of this formula is a forced discipline. You hold your expenses to no more than 90% of your take home pay.
You can even automate the process by having 10% (or any amount you want) deducted from your Salary account and transfer it into a separate account or fixed deposit, recurring deposit or other savings instrument .
So that’s the basic trick to find money!
But, that’s not all. You can also find money from many other sources. For example, Instead of going for parties and shopping, you can set aside extra payments like bonuses, commissions and so forth into your savings Fund.
So try to make it a habit to set aside 10% ( or what ever percentage you would like to set aside) and live with rest. If you do that, you have a great chance to succeed.

MORE TIPS TO CONTROL YOUR EXPENSES:

SPEND LESS

This is one simple method to save more. Sit back and analyse your spending habits and look where you spend more unnecessarily. Once you have identified certain areas of high spending, try to find ways to cut back. Take a decision that you’ll not spend more than a fixed budget.

MAKE A BUDGET

A budget is a very important tool to control expenses. Be it individuals or corporates. A budget is nothing but a chart or a statement that shows how much you earn and hence, how much you can spend.

PAY OFF YOUR LOANS

Loans carry high rates of interest. If you have a lot of EMI’s to pay, it naturally reduces your capacity to save more. It also shows that you’re living on high levels of debt which is not a right thing to do. If you have loans, first look for ways to pre-pay it as soon as possible. Another common area where you could lose a lot of money is credit cards. Credit cards companies slap huge interest for delayed payments.

TRY TO AVOID LATE PAYMENTS

Any bills – like electricity or telephone or internet or credit card has a deadline within which you are supposed to pay the dues. Unnecessarily delaying such payments results in payment of fines. Such expenditures can be avoided if you can get organized on your bill payments. Make a list of monthly payments and the deadline within which you are supposed to pay. These days banks also allow their customers to automate or link their periodic bills to their savings account or credit card.
Credit cards over dues need particular mention here. Credit card companies slap huge interest and fines for delayed payments.

THINK BEFORE YOU BUY

Do not buy anything on impulse. Before laying your hands on any fancy thing which is up for sale, think if it’s really needed.

SHOP SMART

Most of the big brands will be available at throw away prices once there’s an off season sale or sales promotion drive. For example if you want to buy an expensive watch, wait for the company to announce some discount offers. All the big brands announce discount offers at least twice a year.

KEEP DISTANCE FROM LAVISH FRIENDS

High spending lavish friends are may hinder your route to save money. It’s natural for you to get tempted by such friends to buy new gadgets every year. They may be nice guys and may not harm you in anyway, but to keep up with them , it may become necessary for you to spend high ( for example latest electronic items or cars , parties, expensive dresss etc ) which other wise ay not be required !

SAVING ENOUGH IS HALF THE JOB DONE

If you have saved enough,good. but saving is only half the job done.You have to give your savings the right opportunity to grow. Putting all your funds in fixed deposits or fixed income bonds is not a good idea. Your investments should have the right mix of equities, bonds, gold and fixed deposits.Deciding the ‘right mix’ of investments is something an investment expert can do. It depends on an individual’s age and risk profile.

KNOW IT

• Finding money is a matter of making it a priority.
• Pay yourself first and learn to live off with what is left. You will always have money with you. It may be difficult at first. But gradually, you will see your fund growing and that would encourage you to stick to it until you reach your goal of finding enough money.
• Bonuses and extra pays you get are opportunities to buy the latest iphone or Blackberry but a prudent option would be to create a savings out of it
• You can save a lot of money if you control your expenses.
• As time goes by, your small saving will also give you additional money in the form of interest. Finally, you’ll find that you’ve done a great job,creating more money than expected.

Take our word. It’s fool proof !!

Adolf Merckle was one of Germany’s richest business man. He developed his grandfather’s chemical wholesale company into Germany’s largest pharmaceutical wholesaler, Phoenix Pharmahandel . He was educated as a lawyer,  but spent most of his time investing. He lived in Germany with his wife and four children.
In 2006, he was the world’s 44th richest man. Merckle’s group of companies employed 100,000 workers and had an annual turnover of 30 billion euros (around 39.9 billion U.S. dollars).

All this turned upside down after his business empire was plunged into difficulties due to the financial crisis. Merckle hit the headlines in 2008 when he suffered massive losses on investments he had made on movements of the share price in Volkswagen, Europe’s largest car company.
On Jan 06,2009 German news agency DPA reported that –  Merckle, 74, threw himself under a train at his hometown of Blaubeuren, a small town near southern Germany city of Ulm, and a railway worker found his body by the side of the track.
Before his death, he had been negotiating with banks for a bridging loan of 400 million euros (around 547 million U.S. dollars) to save his empire, which includes the pharmaceutical company ratiopharm and drugs maker Phoenix. That figure shows the depth of financial crisis he had.
The picture above shows the place where his body was found. What a tragic end to the life of one of the world’s richest man.


…MERCKLE ISN’T ALONE

Here’s more -
In Jan 2009 , The national suicide preventing hotline in US reports that, calls have soared by as much as 60 per cent over the past year – many of the  calls were from people who have lost their home, or their job, or who still have a job but can’t meet the cost of living.
A 45-year-old businessman in Los Angeles murdered five members of his family before turning the gun on himself, saying in a suicide note that he had done so because of his troubling financial situation.
Karthik Rajaram, 45, who had made almost £900,000 on the London stock market, shot his wife, three children and mother-in-law in the head before shooting himself at the family home near Los Angeles.He did this after seeing his family’s fortune wiped out by the stock market collapse.
A 90-year-old Ohio widow shoots herself in the chest as authorities arrive to evict her from the modest house she called home for 38 years.
In Massachusetts, a housewife who had hidden her family’s mounting financial crisis from her husband sends a note to the mortgage company warning: “By the time you foreclose on my house, I’ll be dead. Then, Carlene Balderrama,  shot herself to death, leaving an insurance policy and the suicide note on a table.


WE INDIANS AREN’T BEHIND..


Thousands commit suicide unable to bear the pressure and crisis, that mismanaged investments create.
Internet and newspapers report about people falling prey to financial frauds like ‘get-rich-quick’ schemes and money chains, eventually losing every penny they had earned.
Did you know that a small state like Kerala spends more than Rs 40 crores a day on lottery tickets alone?According to Tehelka.com’s reporter Shantanu Guha Ray , Illegal lottery tickets account for atleast 60 per cent —Roughly Rs 7,200 crore — of the Rs 13,000 crore gambled every year on lottery tickets in India. All sections of the society are involved in this. I know doctors, HR consultants, engineers, stock market investors, Government officials,housewives and students who regularly put money in lottery tickets. Anyway, lottery tickets ( if you’re lucky to get an original one ) at-least gives you a chance to win.
There is another section of people who gets involved in money chains – where wealth gained by participants entering the scheme earlier, is the wealth actually lost by those coming later. In-spite of hearing about many schemes in which people have lost their wealth, India continues to be a happy hunting ground for such fraudulent operators. The root cause of all this can be brought under one head-Greed for money and  financial illiteracy.
This is exactly the reason why we will first discuss about the basic principles of money management . People spend lakhs to get a  doctor’s degree or a MBA from the most prestigious of  institutes. They spend a lot to pursue their hobbies such as music and salsa.  But when it comes to managing their money , they hardly make any effort to learn  at-least the basics , forget about gaining specialized knowledge !
The next chapter will take you through the basic principles of money management. These principles are important to everyone out there– housewives, businessmen,musicians, students, professionals , priests , social workers.. anyone who deals with money directly or indirectly.

Millions of people fall prey to financial frauds;millions suffer from financial imbalance despite earning good money;even billioners have committed suicide due to financial problems- The root cause of all this is failure in handling their money in an informed manner. People from all walks of life face this problem of financial indiscipline.In the following articles,we detail the basics one must follow while handling their money in order to stay safe and have peace of mind. Some are concepts, while others are practical tips.

• The story of Adolf Merckle

• Principle 1.Finding money !

• Principle 2.Time value of money

• Principle 3. Compounding

• Principle 4. Interest rates.

• Principle 5: Cash reserves and idle cash.

• Principle 6: Never stretch beyond your limits.

• Principle 7. Don’t try ‘Get rich quick’ schemes.

• Principle 8. Inflation

• Principle 9. You are not safe with fixed deposits alone.

• Principle 10. Have a Monthly budget

• Principle 11. Utilize credit cards wisely.

• Principle 12. Lending money to friends and relatives.

• Principle 13. Signing surety for friends.

• Principle 14: Multiple streams of income.

• Principle 15. Do not spend recklessly

• Principle 16. Avoid financial litigations

• Principle 17. Pay your taxes.

• Principle 18. Safeguard your documents.

• Principle 19. Insurance is a must.

• Principle 20. Know your net worth

• Principle 21. Think of retirement when you’re young!

• Principle 22. Diversify your investments.

• Principle 23. Valuation is the key to right investments.

• Principle 24. Gold – A must in your portfolio

Trying to win in the stock market without a trading plan is like trying to build a house without blueprints – costly mistakes are inevitable.


1 – Your strategy to enter and exit trades

There is no denying the fact that earning from stock market is an art, not just speculation, forecasting and analysis. Whether you are a retail investor or a big fund, one question you should ask yourself is “what is your trading cost”?. How much part of your earning are you passing on to your broker in the form of commissions because it really affects your “profit margin”.

If you are already familiar with stock market, there is a small homework for you. Check out the contract note you have received from your stock broker. Or else, if you plan to enter into stock markets and seeking for a broker, exercise your mind a little to know the net brokerage being charged by your broker and study the various commission components. The reason is simple; the amount you pay to your broker may make difference your winning or loosing in the trade. Confused??…It is a common mistake that novice traders execute trade assuming they are earning atleast meagre profit margin, but if all the components including brokerage, taxes, and stamp duty are accounted for, the profit margin comes out to be negative. Isn’t it strange? Yes, so we are here to understand the computation of the net trading amount you pay to your broker.

RATES OF BROKERAGE

There are many brokers charging different rates of brokerage. For example, ICICI Direct charging @.75% and HDFC charging @ .5% of trading amount. However the net trading cost is computed as below:
Trading cost = Brokerage + STT + Stamp duty + other charges
So in addition to brokerage, there are below costs accounted in net amount:

1. STT – Sale transaction tax is imposed on the sale/purchase of securities by retail/institutional investors and is charged on total turnover (cost of each share * no. of shares). For delivery of shares it is charged at .125%. For intraday selling of shares, it is charged @.025%. For buying, there is no tax for intra day trades. Currently government is under consideration to remove/reduce STT because since it was introduced in 2004, the cost of transaction of trades has drastically increased. This leads to loss in business as Indian markets are becoming less competitive compared to other emerging markets.

2. Stamp duty: Stamp duty is also charged on total turnover. For delivery of shares it is charged at .01% and for intra day it is charged at .002%.

3. Other charges: it includes below component:

a. Transaction charges: For trading of shares at NSE, it is charged @ 0.0035% while for BSE, it is charged @ 0.0034%.
b. SEBI turnover charges: For equity transaction, this remains NIL but for derivative transactions, it is charged @ 0.0002% of total turnover.
c. Service Tax: Service tax is charged on all the components

So net brokerage will be calculated as below:
Net brokerage = Brokerage + STT + Stamp duty + Other charges
So next time you trade, try to find out how much earning have you shared with your broker. Happy trading!!

I love my grandfather’s stories. We won't get into the ones that my grandma loves to scoff at. Like his brave encounters with tigers. Or the one about the milk that needed boiling. 
But you must listen to this one. My dear grandpa used to buy 10 litre of milk for 50 paise and 40kg of rice for one rupee a good sixty years ago!  

Don't believe me? Then sample this. In those days, there were coins of one paise and even less! Incredible, eh? But I have seen those with my own eyes in my father's collection of old coins.
What’s more, I also remember seeing and transacting in five paise and ten paise coins in my childhood. Alas! My son won't get to see those currencies. Except in a collection of old coins perhaps. 
Wondering why I am rambling about one paise coins and getting into the generation business? 
This is not a “Kal Aaj aur Kal” story. Or maybe it is. 
If you have an eye for detail you will have noticed the common thread that runs through these anecdotes. The point that I have been trying to make is how expensive things have become over the years. 
My grandfather used to buy 40kg of rice for one rupee and today a kilo of rice costs Rs30! Ten litre of milk cost 50 paise in his days but today you need at least Rs180 to purchase the same amount. 
See what the passage of time has done. It has eroded the value of money. Having Rs800 today is equivalent to having one rupee fifty years ago. 
Economists call it a decline in the purchasing power of money. The purchasing power of money is the amount of merchandise that a unit of money (say a rupee) can buy. 
And the term “inflation” has its roots right there. When the purchasing power of money dwindles with time, the phenomenon is called “inflation”. This is manifested in a general rise in prices of goods and services.
But why do prices rise? Let us understand why this happens with the help of a simple example. Onions are an integral part of any food preparation in our country. Can you think of having a meal without having a dish that contains onion? Why, onion and chapattis constitute the staple diet for many people!
Let us assume the onion crop fails in a particular year, for whatever reason.
What happens then? The supply of onions in the market drops. However, people still need onions. Inevitably, the price of onion shoots up as people scramble to buy the limited supply of onions. 
Remember November of 1998? Such a situation had actually happened in several parts of the country.  It had nearly brought down the government. The price of onions had risen to as high as Rs40 per kg or more. 
But how does a simple thing like a one-off drop in onion supply causes prices to rise across the board in a sustained fashion? 
In the winter of 1998, the dabbawallas and restaurants were forced to hike their prices in response to the rising prices of onions. Even your local barber and maidservant demanded a higher pay to meet their higher daily expenses. All thanks to the (mighty?) onion. This set off a chain reaction. 
How?
Think again. It is not only onions that we consume in the course of a day. There is a whole basket of products and services that we draw on, on a day-to-day basis.
Hence, some of you decide to use more of garlic to make up for the lack of onion. The demand for garlic goes up. A few who eat raw onions decide to substitute it with more of tomato and cucumber. The local sabjiwala senses this shift in consumption happening. The smart businessman that he is, he hikes prices of all vegetables. He starts earning more money. Now his children demand that he should get them a new 21" TV with 100 channels.
And with all sabjiwalas rushing to the nearest TV shop, the sales for TV picks up. The TV company makes more money. Noticing the ballooning profits, the employees of the company demand a hike in their salaries. You are lucky to be working for one such profit-making company. You have more money in your pocket. And you have always wanted to buy a car...
We could go on and on, but you get the idea, don't you? The price rise is here to stay. We just need to understand the concept of inflation. After all, the main objective is to figure out how inflation affects the three friends, saver, borrower and investor.
We know how important it is for all of us to save. We all need to save for the day when we will not be earning but will still need to spend money on food, clothing and the occasional movie. 
What would have happened if my grandfather had saved a rupee fifty years back to buy rice now? Oh boy! It would have been a total rip-off. He would receive a few grains of rice in exchange for that amount.
In short, inflation is one BIG enemy of savers.
So, why should we save?
A good and important question. But we will come back to it later. We need to find out how this monster they call inflation affects our two other friends.
We know that borrowing is the opposite of saving. So if the saver is losing, the borrower must be winning.
Yes, of course. After all, the borrower borrows to spend today and repay later. Imagine if my grandfather had saved a rupee fifty years ago and my grandfather's neighbour had borrowed it from him. The neighbour could have bought 40kg of rice then and have had a feast. In case he repaid the money to my grandfather now, all that my grandfather would have been able to buy with the rupee would be a few grains of rice!
To top it all, the borrower spends NOW and adds to the inflation effect, compounding the misery of our saver.

What about our last friend, investor, the slightly difficult one to understand? 

Imagine once again (just one last time, we promise) that my grandfather's friend had invested a rupee in a paddy field. That is imagine if he had bought a paddy field with a rupee. The smart guy would have been raking in money today, selling a kg of rice at Rs30! 
Our investor friend seems a lot better off than even the borrower who benefits from inflation.
No wonder investing is always considered as a good thing to do to beat inflation. It is what textbooks call “hedging inflation”.
Inflation is constantly increasing the cost of goods and services and eating into the value of your income and wealth. You need to save money and invest it well so that the value of every rupee is augmented. There are several investment options available including equities, mutual funds, bonds, deposits, real estate and gold to name a few.

Investors buy stocks to acquire a partial ownership in a particular company and buy bonds to make a loan to corporations or governments. While stockholders benefit from the company profits, the bondholders receive returns. A fixed rated return is a percentage of the bond’s original offering price. The return is called a “coupon rate.” The principal amount of bonds is returned during the maturity date. Because they can be issued for any period of time, there are some bonds which take about 30 years to mature.

The risk of not being paid back with the principal amount is always carried by bonds. Although companies with higher credit worthiness are more likely to be safe investments, their coupon rates will be lower than those companies with lower credit ratings. Firms such as Standard and Poor and Moody’s Investor Service provide such credit ratings that range from a high AAA to a low D.
The safest type of bonds is the US Government bonds. Blue chip corporations, which are companies with established performance records for over several decades, are also considered to be safe bond investments. Although smaller corporations carry greater risks of defaulting bonds, bondholders of smaller corporations are considered to be preferential creditors because they will be compensated before stockholders in case the business goes bankrupt.
Bonds, just like stocks, can be bought and sold on the open market. The fluctuation of their values is based on the level of interest rates in the general economy. For example, an investor who holds a $1000 bond that pays 5% per year in interest is capable of selling the bond at a price that is higher than the face value as long as the interest rates are below 5%. If the interest rates rise above 5%, the bond can still be sold but it is usually at a price that is less than the face value. Because the potential buyers are capable of getting a higher interest rate than what the bond pays, the seller has to sell at a lower cost in order to offset the difference of the bond.
Most bonds are traded in the Over-the-Counter (OTC) Market that is composed of banks and security firms. Corporate bonds which are listed on stock exchanges may be bought through stock brokers. New bond issues are usually sold in $5000 increments while initial bond issues are quoted in $100 increments. A bond listed at 96 indicates a selling of $96 per $100 face value.

Stocks or Bonds

The risks and the potentials have to be weighed when deciding to invest either in stocks or bonds. Stocks carry a greater potential to increase in value but they also hold a greater vulnerability to market fluctuations. Investment grade bonds, which are rated BBB or better, carry slightly lower risks but offer relatively low yields.
A lot of investors agree that bonds offer greater security and return for short-term situations but when a time span over ten years is considered, the situation changes. The stock market has consistently outperformed bond investments by a large factor since companies tend to increase in value and any short-term fluctuations in the stock market are smoothed out over time.
Because they provide a stable investment that helps cushion against stock market fluctuations, bonds still have their place in most investor portfolios. A mixture of investments that includes stocks from different industries, bonds from various corporations, and other fixed-income investments is one strategic way of providing maximum growth while securing investment funds for the future.

Mutual funds are diverse stock holdings which are managed on behalf of the investors who buy into the fund. Mutual funds allow investors to take advantage of a diversified portfolio without the need of investing a large sum of money.


A diversified portfolio carries the advantage of offering protection against the rapid market losses of any particular stock. If stocks lose their value, the effect will be less if they belong to a portfolio that is spread across twenty stocks than if they belong to a portfolio that is consist of a single stock.
Diversification is always a good idea in making investments. The problem for small investors is that usually don’t have enough funds to buy a variety of stocks. Despite their limited funds, small investors benefit from diversification through mutual funds.

Mutual funds, aside from stocks, can be consisted of a variety of holdings that include bonds and money market instruments. Mutual funds are actually the companies and the investors are really the company share buyers. The shares in a mutual fund are either directly bought from the fund itself or indirectly bought from the brokers who represent the fund. Selling them back to the fund is a way of redeeming shares.

There are some funds which are managed by investment professionals who decide on which securities to include in the fund. Non-managed funds are also available. Indexes, such as the Dow Jones Industrial Average, usually serve as the bases for the funds. The funds, which simply duplicate the holdings of the index where they are based on, rise by a percentage that is the same as that of the chosen index. Non-managed funds often perform well and they sometimes perform even better than managed funds.

Mutual funds also carry some downsides. Aside from paying some fees no matter what the performance of the funds is, individual investors also have no say in which securities have to be included in the funds or not. In addition to this, the actual value of a mutual fund share is not as precise as that of the stocks on the stock market.

For small investors, a mutual fund is still considered to be a better choice than either stocks or bonds because they offer the diversity that provides cushion against unpredictable stock market movements. They also provide a greater return than bonds. Mutual funds can also lose value especially in the short term. Short-term investors are better off with bonds that offer a set rate of return.

The three main types of mutual funds are money market funds, bond funds, and stock funds. The type that offers the lowest risk, money market funds consist solely of high quality investments like those which are issued by the US government and blue chip corporations. Although they rarely lose money, money market funds also pay a low rate of return.

The aim of bond funds to produce higher yields than money market funds caused them to carry a correspondingly higher risk. The risks that are associated with bonds, such as company bankruptcy and falling interest rates, are also applicable to bond funds.

The types of funds that carry both the greatest potential for profitable investment and the greatest risk for losses are stock funds. The risk in stock funds is mostly for short-term mutual fund holders because stocks have traditionally outperformed other investment instruments in the long run.

There are different types of stock funds including ‘growth funds’ that attempt to maximize capital gain and ‘income funds’ that concentrate on stocks that pay regular dividends.

Those with limited funds or investment experiences are recommended to invest on mutual funds. When choosing the right fund, investors have to consider how much risk they are willing to take against their expected investment returns.

Barrel shooting and trading strategies are the two basic ways of stock market trading. Stock trading strategies are used by investors to determine the stocks to buy and the time to sell. It also helps them protect their investments. Trading strategies outperform barrel shooting by a large margin. The different types of trading strategies, which count to over a hundred, are tried and trued methods that have worked well over many years. Before exploring new strategies, beginners in the world of investments are advised to investigate some of the basic trading strategies first.

Hedging

The way of protecting an investment through the reduction of the risks that are involved in holding a particular stock is called hedging. Buying a put option that allows the selling of the stock at a particular price within a certain period of time can offset the risk of a decrease in the stock prices. There will be an increase in the value of the put option once the price of the stock falls. The most expensive hedging strategy is to buy put options against individual stocks. People with broad portfolios will do better if they buy a put option on the stock market itself because it will protect them against general market declines. Selling financial futures such as the S&P 500 futures is another way of hedging against market declines.

Dogs of the Dow

Dogs of the Dow, which gained popularity during the 90s, is a strategy that involves buying of best-value stocks in the Dow Industrial Average. These are ten stocks with the lowest P/E ratios and the highest dividend yields. This strategy presents the idea that the ten lowest companies on the Dow have the most potential for growth over the coming year. The companies listed on the Dow Index are those which offer a reliable investment performance. Pigs of the Dow is a new twist on the Dogs of the Dow. In this strategy, five of the worst stocks on the Dow are selected by looking at the price decline percentage from the previous year. Like in the Dogs of the Dow, the idea in Pigs of the Dow is that the worst five stocks are going to rebound more than the others.

Buying on Margin

The strategy of buying stocks using borrowed money, which is usually from the broker, is called buying on margin. Because they receive more stocks despite the low initial investment, the investors are given much more return by margin buying than by full payments. In the event that the stock loses its value, the losses in margin buying will also be correspondingly greater. In order to limit the losses in case of market reversal, investors should have stop-loss orders when they buy on margin. The margin amount has to be limited to about 10% of the total account value.

Dollar Cost and Value Averaging

The strategy that involves the investment of fixed dollar amounts on a regular basis is called dollar cost averaging. One example of this is the monthly buying of shares from a mutual fund. A drop in the price of the fund will cause the investors to receive more shares for their money but a raise in the price will cause the fixed amount to buy fewer shares. Value averaging, which is an alternative to dollar cost averaging, involves the decision of the investors to set a regular value that they wish to invest on. For example, the investors decide to invest $100 per month in a particular mutual fund. If the price of the fund increases, the investors also put in a higher dollar amount in that fund but if the price of the fund decreases, they spend less money. This will average out their investments to the original $100 per month. Value averaging, as a percentage return on the money invested, outperforms dollar cost averaging most of the time. When used as a part of broader trading strategies, value averaging can actually help in securing the growth of investment funds.

Fundamental analysis is one of the most useful tools that investors use when making decisions about which stocks they’re going to buy. It is a process of examining key ratios that show the current worth of a stock and the recent performance of a company.
Fundamental analysis is used to determine the amount of money a company can make and the kind of earnings an investor can expect. Future earnings may be subject to interpretation but good earning histories create confidence among investors. The stock prices may increase and the dividends may pay out.
Stock market analysts determine whether a company is meeting its expected growth by examining the earnings that are reported by the company on a regular basis. If the company doesn’t meet its expected growth, the prices of its stocks usually experience a downturn.
There are a lot of tools that are used to determine the earnings and the value of a company on the stock market. Most of these tools rely on the financial statements released by the company. Details about the value of a company which include competitive advantages and ownership ratios between the management and the outside investors can be revealed through further fundamental analyses.

Financial Statements

Public traded companies are required to publish regular financial statements. These statements are available either in printed forms or in online pages. These statements include an income investment, a balance sheet, an auditor’s report, and a cash flow statement. They also include a description of the planned activities and expected revenues for the coming year.

Auditor’s Report

One of the most important sections found in financial statements is the auditor’s report. The auditor, who is an independent Certified Public Accountant (CPA), is the one who examines the financial activities of the company in order to determine whether the financial statement is an accurate description of the earnings or not. A financial report is considered worthless without an independent auditor’s report because it might contain some misleading or inaccurate information. Although it is not a guarantee of accuracy, an auditor’s report provides credibility to the financial statement.

Balance Sheet

The balance sheet, which is another important section in financial statements, serves a “snapshot” of the company’s financial condition at a single point in time. It shows the relationship between the assets such as cash, property, and equipment; the liabilities such as debt; and the equities such as retained earnings and stocks.

Income Statement

The section in financial statements that shows the information regarding the company’s net income, revenue, and earnings per share over a certain period of time is called the income statement. The top line of the income statement shows the amount of income that is generated by sales, underneath which the costs incurred in doing business are deducted. The bottom line shows the company’s net income or loss and the company’s income per share.

Cash Flow

The cash flow statement shares some similarities with the income statement because both sections provide a picture of a company’s performance over time. Unlike the income statement, the cash flow statement doesn’t use accounting procedures like depreciation. It simply indicates how a company handles its income and its expenses. The cash flow statement shows the incoming and outgoing cash from the sales, the investments, and the financing of a company. It is used as a good indicator of how the management runs the company and how the company handles the creditors. It also shows from where a company receives its growth capital.

Firstly, decide if you are a trader or an investor. 
 
If you decide to become a trader – to win – you must have a survival strategy…

You need to study the market yourself – not just rely on ‘reading the news’, or listening to others advice and tips.

Take advantage of technology – computers, software, electronic data – all at your finger tips. Seek out charting software and appropriate internet sites – they are plentiful.


Ensure that you ‘manage’ your money and keep some in reserve.

Have the ability to quickly identify failures as well as successes.

Stock Market trading appeals to those who are a little adventurous – rather than just placing their capital into bricks and mortar.


But – be mindful that portfolio values are less stable than real estate as they are continually moving up and down.

However – investing in the Stock Market means that you are putting your money to work – be aware, and enjoy the gains !

Online Stock Trading is a recent way of buying and selling stocks. Now you can buy and sell any stock over the Internet for a low price and you don’t need to call up a broker.
 

These days, you can’t retire without using the returns from investments. You can’t count on your social security checks to cover your expenses when you retire. It’s barely enough for people who are receiving it now to have food, shelter and utilities. That doesn’t account for any care you may need or in the even that you need to take advantage of such funds much earlier in life. It is important to have your own financial plan. There are many kinds of investments you can make that will make your life much easier down the road.

The following are brief descriptions for beginning investors to familiarize themselves with different kinds of investment options:

Life Insurance

Stocks

Stocks are a unique kind of investment because they allow you to take partial ownership in a company. Because of this, the returns are potentially bigger and they have a history of being a wise way to invest your money.

Bonds

A bond is basically a promise note from the government or a private company. You agree to give them a set amount of money as a loan and they keep it for a set number of years with a predetermined amount of interest. This is typically a safe bet and one that is a good investment for a first time investor because there is little risk of losing your money.

Mutual Funds

Mutual funds are a kind of investment that are based on the gains and losses of a shareholder. Basically one person manages the money of several or many investors and invests in a list of various stocks to lessen the effect of any losses that may occur.

Money Market Funds

A good short-term investment is a Money Market Fund. With this kind of investment you can earn interest as an independent shareholder.

Annuities

If you are interested in tax-deferred income, then annuities may be the right kind of investment for you. This is an agreement between you and the insurer. It works to produce income for you and protect your earning potential.

Brokered Certificates of Deposit (CDs)

CDs are a kind of investment where you deposit money for a set amount of time. The good thing about CDs is that you can take the money out at any time without paying a penalty fee. We all know life isn’t predictable, so this is a nice feature to have in your option.

Real Estate

Real Estate is a tangible kind of investment. It includes your land and anything permanently attached to your piece of property. This may include your home, rental properties, your company or empty pieces of land. Real estate is typically a smart and can make you a lot of money over time