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.