Cash reserves are money kept aside as an emergency fund. We are discussing the need to keep cash reserves as our fifth principle because, this is one important idea which most of us neglect. When you set aside some money from your earnings to meet unexpected expenses, there are four advantages that automatically comes with it:
1. Financial safety.
2. It allows you to take advantage of a surprise financial opportunity
3. It creates a compulsory saving habit.
4. Since funds are kept in liquid cash or gold, it earns interest or appreciates in value.
We recommend to create an emergency fund that equals to 4 or 5 months of living expenses; however, you do not need to set aside this total amount in cash alone. It can be in short term fixed deposit or Gold etc..
HOW MUCH RESERVE?
That depends from person to person.
There are a number of factors that influences your decision on the quantum of emergency fund that needs to be created. Factors such as age, occupation, health condition, monthly EMIs, number of members in the family, other sources of income needs to be considered on a one to one basis.
1. AGE:
Depending upon how old you are, the emergency fund required keeps changing. As you grow older, the possibility of medical emergencies is also high. Hence, if your age is on the higher side (let’s say you’re 45 years old) you also need an emergency fund that’s higher than some one who is just turning 30.
2. OCCUPATION:
The style of occupation/business you do is another factor that influences emergency fund decisions. If you are doing a seasonal business or if your job has an uncertain future, you need a higher emergency fund. People living on commission based income would also require a high emergency fund.
3. HEALTH CONDITION:
More reserve funds may be required for a person whose health condition is questionable. The amount of insurance cover he has should also be considered while assessing his future requirement. Higher the insurance, lesser the need for reserve funds on these grounds. Again, if you have your parents or grand parents living with you, you might need to plan accordingly.
4. MONTHLY EMIs.
The volume of debt you have needs to be analysed to get an idea about how much EMIs you’ll have to pay a month. Typically, while creating reserve funds, an amount equal to 6 months EMIs should be kept aside so that in case of emergency, you don’t default in your loan payments. A clear track record of loan re-payments is absolutely necessary for your future financial needs.
5. NUMBER OF MEMBERS IN FAMILY.
If the numbers of members you need to support are more (say 7 members) naturally you need a higher reserve than what would be required if you have only say, 3 members in your family.
6. OTHER SOURCES OF INCOME
You can count on your other sources of income, if any, while creating a reserve fund. One time or casual income or credit card limits should not be considered in this group. However, you can count on the income of your spouse or other family members staying with you in case of emergency.
7. OTHER POSSIBLE EXPENSES.
You may also want to consider other expenses like possible higher education fees for your child who is about to enter college or a possible repair for your house. It all depends from person to person.
HOW TO KEEP RESERVE FUNDS?
Hundred percent of your reserve funds need not be kept in liquid cash. A portion of it can be kept in short term fixed deposits or debt funds and a certain portion in gold or easily marketable securities.
Any cash lying idle over and above your emergency fund results in a lost investment opportunity. You are not making your money work efficiently for you.
THUMB RULE
The thumb rule is – You should have enough reserves to meet all the expenses for 4 or 5 months plus some extra to meet unforeseen expenditure like medical expenses.

HOW TO SPOT IDLE FUNDS?

• First estimate how much emergency fund you’ll require. (typically 3-6 months expenses)
• Now see how much you have in your bank account plus cash in hand.
• Deduct 3 or 6 months emergency fund. The balance is your idle fund.
• This fund should be invested immediately. You can take up a systematic investment plan so that an amount gets invested automatically every month; or you can open an online trading account and invest in stocks or mutual funds at your convenience ; you can opt to open FD linked savings account so that any balance above a certain limit automatically earns interest at a higher rate and so on..

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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!!

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.