Monday, June 30, 2008

US recession effects in GCC economies

The negatives arising from the US recession should not be ignored, at least in the first half of the year, in GCC (Gulf Cooperation Council) economies, but growth momentum should still be maintained

Will slowdown in the US spill over to the GCC?

Despite the apparent resilience of GCC economies to the fall in crude oil prices and the softening in US economic growth back in late 2006, concerns have been recently voiced over the impact of a stagnant or contracting US economy on the performance of GCC economies in 2008, via the conventional crude oil price channel. We believe these concerns are overplayed.

To start with, we cannot downgrade the downside risks to the US economy in 2008, at least during the first half of the year. Recently released macroeconomic data have been mostly negative and suggestive of rather strong spillover effects to output and employment growth.

Notwithstanding the ravaging effects of the subprime crisis on US financial institutions, the unwinding of the housing market bubble continued to spill over to the real economy in the form of dwindling existing and new home sales, declining investments in residential housing, softening growth in non-farm payroll and ultimately disappointing retail sales figures.

Moreover, the aggressiveness of the policy response in itself has further raised market concerns as to the real magnitude of the crisis. For the first time since the deep recession of 1982, the Federal Reserve slashed the Fed Funds rate 75 basis points in a rare off-meeting move on January 22 .

Furthermore, President Bush urged the Congress to approve a fiscal rescue package equivalent to nearly 1 per cent of GDP. As recession fears shrouded investor sentiment, benchmark crude oil prices softened to around $90 per barrel after hitting an all-time high of $100 on January 2 in intra-day trading.

This immediately brought back to memory the sharp fall of crude oil prices in late 2006, when benchmark crude oil prices plummeted to around $50 per barrel after hitting the then new record-high of $77 in August 2006.

Before delving into the reasons why we think that crude oil prices (and hence the health of GCC economies) will remain unscathed in 2008, we can start by spelling out the key differences between the patterns of volatility in crude oil prices and the US economy in 2006 and at present.
First, the fall in crude oil prices in late 2006 materialized against the backdrop of an increase in Opec production and higher OECD commercial inventories, whereas the fall in crude oil prices in early 2008 is coming against the backdrop of lower OECD crude oil inventory levels, and tight market supply/demand balances.

In the fourth quarter of 2007, average daily Opec production stood at 31.7 millions barrels per day, and it is forecast to increase to 32.6 million bpd in 2008, mainly driven by the increase in Saudi Arabia crude oil production.

Nonetheless, the increase in Opec production is forecast to be fully absorbed by rising demand from non-OECD consumers, mainly China and India, which will leave supply/demand imbalances tight throughout the year.

Moreover, the US Energy Information Administration (EIA) has also noted in its latest Short-term Energy Outlook that OECD crude oil inventory levels were nearly 19 million barrels below their 5-year average by end-2007, compared to 100 million barrels above their 5-year average by end-2006. This is also likely to help support the price of oil throughout the course of 2008.

Second, although the downside risks to the US economic outlook have increased considerably since mid-2007, the policy response has so far been starkly different to that in 2006.
Back in 2006, conflicting economic data constrained the Fed's ability to focus on controlling inflation or stimulating growth, a situation that translated into policy neutrality (i.e. stable Fed Funds rate) from mid-2006 until September 2007.

In late 2007 and early 2008 both the Fed and President Bush's administration have become strictly growth-biased. Simply put, there is consensus on the symptoms, diagnosis and cure.
But what if the Fed monetary stimulus policy and the fiscal rescue package failed in lifting the US economy back to its trend-growth path? Will crude oil prices plunge and ripple through to weaker economic performance in the GCC?

We believe the answer is no, owing to the following reasons: - First, history tells us that US recessions, formally defined as two consecutive quarters of negative real GDP growth rates, have become milder in magnitude and shorter in duration.

From the recession of 1982 until 2007, the National Bureau of Economic Research records only two recessions in the US during 1990/91 and 2001.

These recessions have been relatively mild, and only lasted for less than a year each. This suggests that a possible recession in 2008, given the magnitude of the policy response stated above, should be relatively mild and last until the end of the year at the most.

Second, although the US remains the largest economy in the world, its role as a key driver of global economic growth has been relatively declining.

In its latest revision of Purchasing Power Parity (PPP)-based GDP figures, the IMF estimated the share of the US economy in the global economy in 2007 at 19.3 per cent but the combined shares of China and India at 15.5 per cent, ranking them second and fourth largest economies in the world respectively.

Most importantly, China and India contributed almost half of the global economic growth rate for 2007, whereas the US contributed nearly 7 per cent. The latest IMF update on global economic growth published on January 29 also forecasts only a moderate softening of growth in China, the second largest consumer of crude oil, from a red-hot 11.4 per cent in 2007 to 10 per cent in 2008.

Third, data show that average daily global crude oil consumption has not declined in any calendar year since the recession of 1982 in the US. From 1982 until present, average global daily consumption of crude oil has steadily increased, even during the short-lived recessions of the 1990/91 and 2001.

Outlook

In fact, the EIA's latest Short-term Energy Outlook continues to forecast crude oil consumption to grow 1.6 million bpd in 2008, up from 1 million bd in 2007.

The continued growth in crude oil demand amid US recessions has been driven by the relatively low income-elasticity of demand in the US, as well as the rise in consumption by other OECD and emerging market economies, particularly China and India.

Well, so far so good. But what if the 2008 recession proved to be more like the 1982 recession rather than 1990/91 or 2001? Again, we believe there are additional two lines of defence that could sustain crude oil prices on an upward track through a one-to two-year period of global economic slowdown.

The first line of defence is the existence of limited spare capacity amongst Opec producers (except in Saudi Arabia), coupled with the increase in the marginal cost of crude oil production and delay in capacity additions in non-Opec countries.

The EIA notes that spare capacity in Opec stood at around 2 million bpd in 2007, which is mostly held by Saudi Arabia.

However, given Opec's apparent commitment to maintain current quotas, we rule out a significant increase in Opec production in 2008. On the other hand, the marginal cost of production has been steadily rising in non-Opec countries, owing to the increase in construction and labour costs as well as the gradual ageing of cheaply-drilled wells.

In Canada, the second-largest holder of crude oil reserves in the world after the GCC, the marginal cost of oil production has reportedly increased to around $70 per barrel in 2007.
Finally, the EIA also notes that non-Opec capacity-addition plans have been historically very sensitive to shortages in labour and equipment as well as uncertainty regarding the rate of decline in current production. The second line of defence is the persistence of geopolitical risk in key oil-producing regions.

Notwithstanding the persistence of classical geo-political risks in the Middle East and West Africa, the wave of nationalizations that has recently swept major oil-producing countries (Russia, Venezuela and Ecuador, for example) has been also translated into a gradual deterioration in the investment environment.

If not counterbalanced by domestic capital and technology, the weaker inflow of foreign direct investment into the crude oil sector in these countries may have negative repercussions on production volumes and capacity-addition plans over the medium term.

What if these lines of defences also fall? Will the plunge in crude oil prices put a damper on economic growth in the region in 2008? We believe the answer is again no, unless in the very unlikely scenario that crude oil prices break down through the $40-$50 per barrel levels for a protracted period of time.

The presence of sizable foreign reserve cushions and enhanced access to global capital markets across most GCC states provide the region's governments with ample expenditure-smoothing capabilities during times of financial strain.

By the end of 2007, we estimate the GCC holdings of foreign reserve assets, whether held in the banking system or via sovereign wealth funds, will hover around $2 trillion, nearly 4-5 per cent of global GDP. Even under conditions of temporary stress, the high credit standing of the GCC (A-AA, with stable outlooks) allows easy access to global financial markets.

The reader may be reminded that the emirates of Abu Dhabi, Dubai and Ras Al Khaimah have lately sought sovereign credit ratings from S&P to enhance their access to global financial markets.

Bottom line: inasmuch as crude oil prices decouple from the US business cycle and GCC governments build expenditure-smoothing capabilities, the growth momentum of GCC economies will weather negative global demand shocks in 2008.

In our opinion, the key question that will be facing GCC policymakers in 2008 is not how to sustain growth but rather how to manage inflationary growth.

US Economy on brink of recession says Greenspan

Former Federal Reserve Chairman Alan Greenspan warned on Tuesday the U.S. economy was on the brink of a recession, with the chances of that happening at more than 50 percent.

The U.S. economy has been hit by a credit crisis which began in the sub-prime mortgage market, prompting a series of interest rate cuts to help boost the economy. But price pressures are growing, making more rate cuts unlikely.

Asked if the U.S. economy was in recession, Greenspan said: "We are on the brink."

A quick recovery was unlikely, he said via video link to a conference in Johannesburg. "A rebound at this stage is not something I think is in the immediate outlook," he said.

"There are still very considerable structural problems remaining in the financial system. They will remain for a while. It's going to be very difficult. There are a lot of unexpected adverse events out in front of us," Greenspan said.

Greenspan said he did not believe arguments that the housing problems in the U.S. were due to interest rates being too low during his tenure. "As far as I'm concerned, the data do not support it (that argument). The housing bubble is clearly an international phenomenon."

On South Africa, Greenspan said the country's Reserve Bank had been right to raise interest rates in the face of accelerating inflation.

"The problem that you have here is that ... significant pressures are coming from oil and food, but they are none the less real," he said. "The price increases are real and unless the central bank leans against them ... you will get a highly unstable inflation environment."

South Africa's central bank has raised its repo rate by 500 basis points to 12.0 percent since June 2006 to try tame inflationary pressures. But its targeted inflation gauge continues to accelerate, reaching 10.4 percent year-on-year in April.

Friday, June 27, 2008

Nifty 50

Nifty 50 (Nifty fifty) or simply Nifty is a composite of the top 50 stocks listed on the National Stock Exchange (NSE), representing 24 different sectors of the economy. It is a simplified tool that helps investors and ordinary people alike, to understand what is happening in the stock market and by extension, the economy. If the Nifty Index performs well, it is a signal that companies in India are performing well and consequently that the country is doing well.

An upbeat economy is usually reflected in a strong performance of the Nifty Index. A rising index is also indicative that the investors are gung-ho about the future. The Nifty Index is based upon solid economic research. It is internationally respected and recognized as a pioneering effort in providing simpler understanding of stock market complexities.

Nifty is the flagship index of NSE, the 3rd largest stock exchange in the world in terms of number of transactions (Stock Futures).

Who owns it
Nifty was developed by the economists Ajay Shah and Susan Thomas, then at IGIDR. Later on, it came to be owned and managed by India Index Services and Products Ltd. (IISL), which is a joint venture between NSE and CRISIL. IISL is India's first specialized company focused upon the index as a core product. IISL have a consulting and licensing agreement with Standard & Poor's ( who are world leaders in index services.

CNX stands for CRISIL NSE Indices. CNX ensures common branding of indices, to reflect the identities of both the promoters, i.e. NSE and CRISIL. Thus, 'C' stands for CRISIL, 'N' stands for NSE and X stands for Exchange or Index. The S&P prefix belongs to the US-based Standard & Poor's Financial Information Services.

It is calculated as a weighted average, so changes in the share price of larger companies have more effect. The base is defined as 1000 at the price level of November 3, 1995

What are the Criteria for inclusion of Stock in Nifty50
Average market capitalization of Rs.5,000 million or more during the last six months.

Liquidity: Cost of transaction (impact cost) of less than 0.75% for more than 90% of trades, over six months.

At least 12% floating stock (not held by promoters of the company or their associates).

Tuesday, June 24, 2008

What is inflation rate?

India’s inflation rate is 11 plus due to fuel price hike. But it could be impacting you by a higher degree.

Giving you a hypothetical example on inflation rate and its effect on you, to explain about inflation for you to understand it better.

Flipping through TV channels for some time, she finally settled on a new business news channel. He was talking about the rate of inflation and mentioned that it was 8.1% last week and crossing the 8% level for the first time in so many years. But within one week after reaching 8 % India's inflation rate shoots to 13-year peak of 11.05 pct.

What is inflation?

“Inflation? What’s that?” she wondered.
The first thought was to Google the word and find the answer. Then she decided against it. She was already down three bottles of beer and wasn’t really in a mood to log on.

The next best thing was to call up her ‘four-o-clock’ friend and ask him. He would surely know.
“So what is inflation?” she called him and asked.

“Madam, it’s three hours after midnight. Can we do this tomorrow morning?” he asked sleepily. "No. Not tomorrow morning. I want to know right now,” she replied stubbornly.

Define Inflation.
“Ok. Don’t shout. Inflation is the rate at which price rises over a period of time. Now, can I go to sleep?”

“That’s all? I want to know more,” she said, the alcohol seemingly taking effect. “This rate is measured over a period of one year usually. So let’s say you spent Rs 500 a month on your toiletries a year ago and now pay Rs 600 for it, then the rate of inflation is 20% for that basket of goods.”

“Hmmm. But that anchor kept saying WPI has crossed 8%, over and over. What is that?”

“WPI is the acronym for wholesale price index. You see, the government needs some measure of inflation for the overall economy.

WPI is one such measure, calculated every week, by the Central Statistical Organisation. It is essentially a representation of the increase in the wholesale price of goods that constitute this index.

There are 435 items that are a part of this index. So when we say that WPI is at 11.05% what it means is that the price of this basket of 435 items has gone up by 11.05%, since the same time last year,” was the long response.

“So is this the rate of inflation that would affect me?” she asked.
“Not really. And there are several reasons for that. The first reason is that the prices used to construct WPI are wholesale prices.

The prices at the retail level increase more than the prices at the wholesale level. Therefore, to that extent, this is not a clear representation of your rate of inflation.

The WPI also contains items like electricity for railway traction, purified terephthalic acid (PTA), injection moulded plastic items, railway sleepers, cold rolled sheets, jelly filled telephone cables and others.

Now these items, as you would appreciate, have nothing to do with our everyday lives. There is another major reason why this does not represent your rate of inflation. If I may ask, what constitutes your biggest monthly expense?”

“Well, other than the beer I drink, it’s the monthly rent I pay for this flat,” she said.

“Exactly. But the rent is not a part of WPI. So in order to get a correct idea of how inflation is affecting you, you need to construct your own inflation number. Give me a minute, I will email you a table, which you need to fill up. You will get your rate of inflation.

It basically contains entries on various things you spend your money on. The amount you spent in May 2007 and the amount you spent in May 2008.

The table will tell you the increase in your expenses since the same time last year. So fill it up and send it back to me fast.”

She booted her laptop, keyed in a few numbers and mailed it back. “I see your salary has remained constant since last year-one of the perils of working for the IT industry.

Your monthly expenditure in May last year was Rs 30,000. Now it has gone up to around Rs 35,000, which means an increase of 17%. And that my dear is the rate of inflation for you and which is nearly double of the WPI,” he said.

Before she could protest, he continued, “If you wanted to maintain your savings of Rs 30,000 per month, your salary should have gone up by around 10% to around Rs 55,000.

Looks like it’s time to go looking for another job or cut down on your expenses. Start with less beer every month. And now let me sleep.” And he hung up.

Sunday, June 22, 2008

Dont exit SIPs when the market is falling

When the market is falling, it happens that most investors think of stopping their Standard investment Plans (SIPs) or exit. But it does not make sense to do so as you are getting more units of the same fund for the same money.

When the market falls which results in the price of NAV falling. But when the NAV falls, you are going to get more units of the fund. That means when the market turns around later, you will get much more returns.

Suppose the NAV of a fund is Rs 20. When you invest Rs 5,000 in that fund, the total number of units purchased would be 250 (Without considering 2.25 per cent entry load and an annual 2 per cent fund management charge in equity funds).

However, there is no entry load on investors if they approach the asset management company directly.
Now, if the NAV falls to Rs 18, the number of units that can be purchased is 277.7. A further fall to Rs 15 and the number of units in the kitty is 333.3. Let us take Shah's case. If he were to continue his SIPs, the numbers could look something like this.

Suppose, he accumulated 1,500 units in the first six months at the NAV of Rs 20, another 1110.8 for four months at Rs 18 and another 1333.2 units for another four months at Rs 15, the total number of units he got is 3,944.

If the markets were to turn around in, say, six months and the NAV was to rise to Rs 25, his portfolio would be worth Rs 98,600 (on an investment of Rs 70,000).

And the additional 444 units accumulated during the falling market have added Rs 11,100 to the corpus.

Moral of the story: It's a good idea to continue your SIPs in a falling market. Its like buying shares at a lower price.

Wednesday, June 18, 2008

What do experts say at this present market level

While some may have bought stocks at the highest level, others could contemplate buying more of the same stock. New investors may be sitting on the fence on when to enter the market. What do experts have to say at this current level.

Where are the markets headed now?
I think the markets will be range bound. Downside is limited from here: The Nifty may not go below 4450 to 4500. At the same time we don't see the Nifty crossing 4700 to 4800 levels in a hurry. We expect the market to consolidate in the next two weeks.

In such uncertainty what should investors do: Buy/hold/ sell?
I think investors should hold and buy at lower levels. They should normally buy on days when there are major dips. Suppose if the Nifty goes to 4600 levels and then drops a 100 points then that should be a day to buy.

What would you be buying on such days?
We are buying across all sectors except realty. The reason we are avoiding realty is clearly because property prices are headed south. It doesn't make sense buying realty stocks at this point in time. Perhaps we will get the same realty stocks at lower levels by November-December.

Real estate prices are expected to correct by 15 to 18 per cent in the next six months. Apart from realty we are buying across as they are available cheaply at current levels. Be it banking, capital goods, and mid-cap stocks in the IT sector investors can buy.
From the Sensex investors can pick Larsen & Toubro and BHEL.

What would be your advice to young investors?
This bunch of investors should preferably invest via the mutual fund route or should buy only frontline blue chip stocks.

Any Sensex levels for December 2008?
The Sensex should be around the 19000 to 20000 level. Earlier we were looking at the 21000 to 22,000 mark but now looking at the way things are we have scaled it down. Given a six month to one year investment horizon we are reasonably bullish on the Indian stock market.

Tuesday, June 17, 2008

Who sets Global Crude oil price

Everyone thinks that oil price is set by the Organization of Petroleum Exporting Countries or OPEC, a permanent intergovernmental oil organisation, created in 1960 by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela.

But the fact is that it is not OPEC that sets the global oil price. One of the most common misconceptions about OPEC is that the organisation is responsible for setting crude oil prices.
Although OPEC did in fact set crude oil prices from the early 1970s to the mid-1980s, this is no longer the case. It is true that OPEC's member countries do voluntary restrain their crude oil production in order to stabilise the oil market and avoid harmful and unnecessary price fluctuations, but this is not the same thing as setting prices.

In today's complex global markets, the price of crude oil is set by movements on the three major international petroleum exchanges, all of which have their own Web sites featuring information about oil prices.

They are the New York Mercantile Exchange (NYMEX, http://www.nymex.com), the International Petroleum Exchange in London (IPE, http://www.ipe.uk.com) and the Singapore International Monetary Exchange (SIMEX, http://www.simex.com.sg).

OPEC does not control the oil market. OPEC member countries produce about 45 per cent of the world's crude oil and 18 per cent of its natural gas.

However, OPEC's oil exports represent about 55 per cent of the crude oil traded internationally. Therefore, OPEC can have a strong influence on the oil market, especially if it decides to reduce or increase its level of production.

Crude Oil Prices Set to increase more

Goldman Sachs recently forecasted that oil would be at $141 a barrel by the end of the year, and rising to $200 a barrel in the not too distant future. I have seen other forecasts calling for oil to slip significantly under $100 a barrel before starting yet another bull market.

I have written for years that we are not going to run out of oil or energy, just cheap oil. I was just in South Africa, where much of their gas and diesel comes from coal gasification. At one time this was an expensive way to make gas, and South Africans had to pay more for their gas than the rest of the world. Now, it is getting close to "par" to the cost of gas in the US, and is cheaper than gas in Europe.

In this week's Outside the Box, my friend David Galland at Casey Research presents some very troubling thoughts on why oil may rise higher than we think in the next few years. Many of the countries from which the US gets its oil are seeing production fall, not rise. Some of it is political ineptitude, but much of it is from oil production peaking.

Yes, we can move to coal gasification, and the US has centuries of coal for such purposes, but building such plants takes time and capital and political will, the latter of which is in short supply. In the meantime, and until we get a full-blown crisis, oil is going to continue on its path to $200 and higher. But such a rise will not only make gasoline prices higher, it will make a host of new technologies competitive for the first time. The shift in how we make energy is inevitable.

As a quick aside, if we would start a project to build a massive nuclear infrastructure, such as in France, which produces 80% of its energy from nuclear, while at the same time pushing ahead in a Manhattan-type project the development of electric cars (or some hybrid), we could reduce our dependence on foreign oil and lower travel costs by the middle to the end of the next decade. And the environment would be cleaner and safer.

We are headed to such a future. It would be nice if we did it sooner rather than wait for a real crisis. But in the meantime, the price of oil is going to rise and opportunities for investors will rise along with it. My friends at Casey Research publish an excellent newsletter highlighting the opportunities not just in exploration companies but in all manner of energy-related firms. As David writes:

"The good news is that there are no shortage of high-quality energy-related investments available ... in coal, heavy oil, LNG, photovoltaics, natural gas consolidators, "run of river" hydroelectric, uranium and small to mid-cap oil companies with the potential for significant near-term gains in reserves or production."

This article is written by John Mauldin

How mutual fund ads try to fool you?

You would have noticed all those mutual fund ads that quote their amazingly high one-year rates of return. Your first thought is "wow, that mutual fund did great!" Well, yes it did great last year, but then you look at the three-year performance, which is lower, and the five year, which is yet even lower. What's the underlying story here? Let's look at a real example. These figures came from a local paper:

1 year - 53%
3 year - 20%
5 year - 11%

Last year, the fund had excellent performance at 53%. But in the past three years the average annual return was 20%. What did it do in years 1 and 2 to bring the average return down to 20%? Some simple math shows us that the fund made an average return of 3.5% over those first two years: 20% = (53% + 3.5% + 3.5%)/3. Because that is only an average, it is very possible that the fund lost money in one of those years.

It gets worse when we look at the five-year performance. We know that in the last year the fund returned 53% and in years 2 and 3 we are guessing it returned around 3.5%. So what happened in years 4 and 5 to bring the average return down to 11%? Again, by doing some simple calculations we find that the fund must have lost money, an average of -2.5% each year of those two years: 11% = (53% + 3.5% + 3.5% - 2.5% - 2.5%)/5. Now the fund's performance doesn't look so good!

It should be mentioned that, for the sake of simplicity, this example, besides making some big assumptions, doesn't include calculating compound interest. Still, the point wasn't to be technically accurate but to demonstrate how misleading mutual fund ads can be. A fund that loses money for a few years can bump the average up significantly with one or two strong years.

Thursday, June 12, 2008

Causes and Cost of inflation

During World War II, you could buy a loaf of bread for $0.15, a new car for less than $1,000 and an average house for around $5,000. In the twenty-first century, bread, cars, houses and just about everything else cost more. A lot more. Clearly, we've experienced a significant amount of inflation over the last 60 years.

When inflation surged to double-digit levels in the mid- to late-1970s, Americans declared it public enemy No.1. Since then, public anxiety has abated along with inflation, but people remain fearful of inflation, even at the minimal levels we've seen over the past few years. Although it's common knowledge that prices go up over time, the general population doesn't understand the forces behind inflation.

What causes inflation? How does it affect your standard of living? Lets shed some light on what causes inflation and the cost of inflation.

Causes of Inflation
Economists wake up in the morning hoping for a chance to debate the causes of inflation. There is no one cause that's universally agreed upon, but at least two theories are generally accepted:

Demand-Pull Inflation - This theory can be summarized as "too much money chasing too few goods". In other words, if demand is growing faster than supply, prices will increase. This usually occurs in growing economies.

Cost-Push Inflation - When companies' costs go up, they need to increase prices to maintain their profit margins. Increased costs can include things such as wages, taxes, or increased costs of imports.


Costs of Inflation
Almost everyone thinks inflation is evil, but it isn't necessarily so. Inflation affects different people in different ways. It also depends on whether inflation is anticipated or unanticipated. If the inflation rate corresponds to what the majority of people are expecting (anticipated inflation), then we can compensate and the cost isn't high. For example, banks can vary their interest rates and workers can negotiate contracts that include automatic wage hikes as the price level goes up.

Problems arise when there is unanticipated inflation:

  • Creditors lose and debtors gain if the lender does not anticipate inflation correctly. For those who borrow, this is similar to getting an interest-free loan.
  • Uncertainty about what will happen next makes corporations and consumers less likely to spend. This hurts economic output in the long run.
  • People living off a fixed-income, such as retirees, see a decline in their purchasing power and, consequently, their standard of living.
  • The entire economy must absorb repricing costs ("menu costs") as price lists, labels, menus and more have to be updated.
  • If the inflation rate is greater than that of other countries, domestic products become less competitive.

People like to complain about prices going up, but they often ignore the fact that wages should be rising as well. The question shouldn't be whether inflation is rising, but whether it's rising at a quicker pace than your wages.

Finally, inflation is a sign that an economy is growing. In some situations, little inflation (or even deflation) can be just as bad as high inflation. The lack of inflation may be an indication that the economy is weakening. As you can see, it's not so easy to label inflation as either good or bad - it depends on the overall economy as well as your personal situation.

Inflation

Define inflation
Inflation is defined as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase. As inflation rises, every dollar you own buys a smaller percentage of a good or service.

The value of a dollar does not stay constant when there is inflation. The value of a dollar is observed in terms of purchasing power, which is the real, tangible goods that money can buy. When inflation goes up, there is a decline in the purchasing power of money. For example, if the inflation rate is 2% annually, then theoretically a $1 pack of gum will cost $1.02 in a year. After inflation, your dollar can't buy the same goods it could beforehand.

Some variations on inflation
Deflation is when the general level of prices is falling. This is the opposite of inflation.

Hyperinflation is unusually rapid inflation. In extreme cases, this can lead to the breakdown of a nation's monetary system. One of the most notable examples of hyperinflation occurred in Germany in 1923, when prices rose 2,500% in one month!

Stagflation is the combination of high unemployment and economic stagnation with inflation. This happened in industrialized countries during the 1970s, when a bad economy was combined with OPEC raising oil prices.

In recent years, most developed countries have attempted to sustain an inflation rate of 2-3%.

Gold Investment

Gold has long been valued as an investment because it doesn't tend to move along with stocks or the dollar, analysts disagree over whether it makes sense to invest in now.

Gold, whose price hit an 11-month high Monday as the dollar weakened, is often seen as a refuge in times of economic uncertainty. Lately, with gold prices hovering below $700 an ounce, experts seem torn on its prospects. In any case, moderation is in order.

"I'm very bullish from the demand viewpoint," said Frank Holmes, chief investment officer at U.S. Global Investors Inc. He contends rising income in developing countries with a cultural affinity for gold _ particularly India where it is widely used in jewelry _ is a good sign for gold demand. Holmes noted that prices for gold have lagged those of metals such as copper, zinc, platinum and nickel. Those metals, he said, are in greater demand as countries develop infrastructure. Later, as such development increases economic prosperity, demand for gold begins to rise, he said.

"In India you basically buy gold with only a 10 percent markup so you wear your money," he said. He added countries with rising wealth, such as Russia, look to gold as a way to hold their national reserves, as occurs in the United States.

Even if demand increases, adding to supplies has become more difficult. Production has fallen from years past because it now takes longer to win approval for new mines and to shepherd them into production in part because of environmental concerns.

Even if production were to increase, however, prices might still increase. Gold, which came close to topping $700 an ounce in late February before pulling back, has seen prices follow the ebb and flow of political tensions in the Middle East.

Holmes also noted the gold often moves in a similar direction as oil; recently oil prices have climbed amid increasing demand, in part from developing countries like China and India.

Ultimately, while he contends gold can be a wise investment, he recommends investors not make it more than 10 percent of their overall holdings.

Not diving too heavily into gold but rather moving in as part of a larger focus on commodities could be a sound move, contends Michael Kimmel, an analyst at RegentAtlantic Capital LLC.
"Even though it's had a great return in the short term, it's not as good over a longer period," he said. "Inflation has outpaced gold, which hurts the investor's purchasing power in the long run." He cited the performance of gold over the past 30 years.

Kimmel describes gold as a very "frisky" asset class, noting its volatility could prove unnerving to some investors.

"We like to say it has all the volatility of stocks with the return of bonds," he said. But he added it often holds up well during tough times for stocks: "If the stock market is doing poorly and the dollar is weak, it's a great hedge."

So for investors concerned about a pullback in the stock market, the strength of the dollar or increased political turmoil, a moderate investment in gold can be wise _ if they're willing to stomach possible volatility.

Monday, June 9, 2008

Some more tips from Warren Buffet

Learn some more investment tips from the investment guru Warren Buffet and invest like Warren Buffet.

  1. Beware of companies displaying weak accounting.
  2. Unintelligible footnotes usually indicate untrustworthy management.
  3. Be suspicious of companies that trumpet earnings projections and growth expectations.
  4. Suspect those CEOs who regularly claim they do know the future –and we become downright incredulous if they consistently reach their declared targets.
  5. Managers that always promise to “make the numbers” will at some point be tempted to make up the numbers.
  6. Derivatives are financial weapons of mass destruction.
  7. A director whose moderate income is heavily dependent on directors’ fees is highly unlikely to offend a CEO or fellow directors, who in a major way will determine his reputation in corporate circles.
  8. If regulators believe that “significant” money taints independence (and it certainly can), they have overlooked a massive class of possible offenders. (referring to outside directors)

Those attributes are two legs of our “entrance” strategy, the third being a sensible purchase price. We have no exit to strategy – we buy to keep.
That is one reason why Berkshire is usually the first- and sometimes the only – choice for sellers and their managers.

Investment guru Warren Buffet's tips and practical advice

Every one wants to become like Warren Buffet. What is it that made Warren Buffet as Warren Buffet. Lets soak up some of Buffett's wisdom for investors. He writes insightful essays in annual reports and letters to shareholders. You can look them up at berkshirehathaway.com.
Buffett also answers questions from shareholders at the company's annual meetings. Here are some samples from the most recent meeting.

  • Patient investing. We have $16 billion in cash not because of any predictions [about a market decline], but because we can't find anything that makes us want to part with that cash. We're not positioning ourselves. We just try to do smart things every day, and if there's nothing smart, then we sit on cash.
  • Commitment. If we start buying a stock, we want to go in heavy. ... We've made some big mistakes starting to buy something that was cheap and within our circle of competence, but trickled off because [the] price went up a bit. Good ideas are too scarce to be parsimonious with.
  • The big ones. I used to handicap horses. ... If someone asked me to handicap the 500 companies in the S&P 500, I wouldn't do a very good job. You only have to be right a few times in your lifetime, as long as you don't make any big mistakes. Ted Williams, in his book The Science of Hitting, talked about how he carved up the strike zone into different zones and only swung at pitches that were in his sweet spot. Investing is the same way.
  • Coca-Cola. When I talked about Coca-Cola being an "inevitable," I talked about the probabilities that Coke will dominate the global market for soft drinks. I don't think anything will change that. It has a huge distribution system and position in people's minds worldwide. They'll make a little more profit per drink sold over time as well. I don't know how anyone could dethrone them.
  • More on patience. If the market closed for years, we wouldn't care. Would still keep making Sees candy, Dilly bars, etc. If you focus on the price, you're assuming that the market knows more than you do. That may be the truth, but in that case you shouldn't own it. The stock market is there to serve you, not to instruct you.
  • Meeting with management. Almost everything we learn is from public documents. ... We do not find it particularly helpful to talk to managements. ... The numbers tell us a lot more than the managements. We don't give a hoot about anyone's projections. We don't want even want to hear about it.
  • Stock options. Options are a royalty on the passage of time. They put management's interests contrary to the interests of shareholders. We believe in tying incentives to things under management's control. To give a lottery ticket to someone who runs 1 percent of Berkshire is really crazy. We saw more crazy stuff in the 1990s than in the previous 100 years.
  • Banking. If you can just stay away from following the fads and making bad loans, [it] has been a remarkably good business. Since WW II, return on equity for banks that have stayed out of trouble has been good. Some large well-run banks earn 20 percent ROE. I've been surprised that margins in banking haven't been competed away. ... Some banks get into trouble making bad loans, but you don't have to.
  • Sticking with what you know. I know people will be drinking Coke, using Gillette blades and eating Snickers bars in 10-20 years and have [a] rough idea of how much profit they'll be making. ... Somebody will make money on cocoa beans, but not me. I don't worry about what I don't know — I worry about being sure about what I do know.

Successful investors secret to profit in any market

On account of global and domestic slow down in the economy Indian stock markets once again ended on negative note . Many new investors decided not to invest in stocks after burning their fingers in Reliance Power IPO. Why some investors gaining while others losing in the markets.

Some secrets of successful investors

1. Herd mentality: They sell their holding when others are buying. These investors sold their stocks when herds were buying at 20,000 levels in January. Successful investors will never follow herds and go against tide.

2. Work hard: One should systematically work hard on research if you want to make money in stock markets. It is surprising to find that even intelligent people with good analysing capabilities will invest in stock markets just basing on broker’s tips. Successful investors will never put their money without enough research.

3. Fundamentals: If you are an investor, it is better to focus on fundamentals. Technicals are for traders. If you invest in a good company with sound fundamentals with reasonable valuations, you will never lose money in long term. Never buy penny stocks.

4. Volatile growth stocks: These stocks with very high beta give exceptional returns in bull markets but may give sleepless nights in the current situation. Diversify your portfolio. Successful investors will never put all their money in one stock or one sector.

5. Initial obstacles: All great investors lost money in their initial days including Warren Buffett. You should ready to face losses in the initial investment days. Go slow initially and learn from losses. Many new investors who lost their money in the Reliance Power IPO will never return to market for another 3-4 years or when Sensex makes new highs and once again burn their fingers. Stay cool in the crisis.

6. Greed and fear: These two characters are biggest enemies for every investor. Unless you overcome them, you will never become a successful investor.

7. Go long: Day traders will never beat long term investors in the earnings. Stay away from day trading. Never put you money in speculative stocks and Z, S and T group stocks.

8. No sentiments: Don’t become sentimental with your stocks. Successful investors sell their stocks when they reach target. There should be specific reason to hold your stock even after it attains your target price.

Sunday, June 8, 2008

Investment

Some Do's and Dont's of investment
Planning of investing? Are you a beginner in investing. Some basic investing tips for dummies and also for experienced investors in a crashing market like this.

  1. Invest a fixed sum regularly. It is called SIP, (Systematic Investment Plan). It may be weekly/monthly or yearly or any fixed number of days.
  2. Pick fundamentally strong counters.
  3. Book profits when the stock rises above your expectations. That is you purchased a stock at Rs. 100 with a target of Rs. 150 over next one year. You see the stock rise by 15-20% within a month. Sell at least a part of your holdings. This will reduce your holding cost. Even if you sell 25% of the shares at Rs. 120, your cost for 75% holdings gets reduced to Rs. 93.33.
  4. Never panic in corrections/crashes (doesn't hold good if you have companies with poor or zero fundamentals)
  5. Keep updating yourself on companies’ fundamentals. At least look whether sales and net profits are on the rising line. Do not hesitate to get out of a company when the results are poor.
  6. Always keep at least 15% cash. Invest this in fundamentally strong companies which become available at cheap rates during crashes.
  7. If you are an earning member, keep investing a fixed portion of your earnings in same stocks (again SIP)
  8. If you are a retired person, do not invest more than 50% of your long term money.
  9. If you do not understand what a company is doing in actual day to day business, never invest in it.
  10. Never ignore fundamentals.
  11. People look at losses from latest purchases. They miss out that we purchased this stock partly from profits of earlier purchases. Even after the recent fall, my folio is up almost 50% in last 1 year. But most of my current holdings are in red that too by 10-15%. Learn to keep a correct track of what your original investment was and what is its value as on date. Use good portfolio software on net. (Just have a look at our 25k model portfolio)

Hope this helps you.

Systematic Investment Plans (SIP)

What is an SIP and What kind of SIP methods one can use

SIP = Systematic Investment Plans. Its the most workable strategy in a Volatile Market but in a good stock.

  1. Its a financial Planning in stock market.
  2. The word " systematic " is important and means regularly.
  3. Planning means thinking on a time frame.
  4. Price is apparently not important at the time of investing.
  5. Understanding markets movements not important.
  6. One have to invest in companies whose management is top class.
  7. Last but not the least and the most important.

You have to have patience, patience and more patience. I will try to explain by an example. I hope many of you understands it. Now let me state an example on Wipro that IF someone has runned SIP in it since 1990-2005 on a yearly basis of a small value of just 50K per year.

Year Quantity Rate Rs.( Adjusted Price )
1990 35700 1.40
1991 26300 1.90
1992 14700 3.40
1993 14000 3.65
1994 5800 8.60
1995 4600 10.85
1996 5800 8.60
1997 3100 15.80
1998 820 61.29
1999 115 434.00
2000 125 401.00
2001 187 267.00
2002 184 272.00
2003 172 290.00
2004 134 374.00

Total Quantity of Shares = 1,11,845
Total Investments = 50,000 x 16 = 8,00,000
Current Valuation = 6,30,00,000

Now questions might arise like how do we know that this Company will perform good in next 16 years or so ?? Can you tell me a particular stock in which I can run SIP for a longer time period ? Do you know any future's INFY or Wipro ?

No..I dont know..IF I knew then I would'nt have been here..But yes,I am willing to try and I know IF I will,then I will achieve it one day.

Is starting a 16 years Value buy SIP is right now?
I would say No. Cos we are into bull markets and we wont be able to make higher returns if we wait for 16 years. I would say that run a SIP for next 5 years on a Monthly basis or Fortnight.

Decide a value as per as your convenient and SIP into few particular stock. Make sure that you cover all the 7 points which I discussed above.

Friday, June 6, 2008

Investing in Gold - How to invest in Gold?

Gold continues to be a popular form of investment right for a very long time. People prefer to invest in gold because the returns are usually high and above all gold is a very famous ornament. Even if they don't get good returns they wont face losses because their cosmetic purposes will be served.

Some tend to posses gold even as a matter of prestige. It is regarded to be a good source of investment as it controls inflations and even helps you to raise finances in the future.

Gold Markets
Gold is traded in many markets around the globe. London and New York are supposed to be large markets for gold and they function through the day. It is worth mentioning that Kong Kong and Zurich market are also open to trading for 24 hours. The gold market functions like a stock exchange in l aspects of buying selling and determination of prices though the fact remains that different factors influence the price.

World Gold Council
World gold council is a forum of gold producers around the globe. The basic objective of this body is to disseminate information regarding investing in gold and also to create an awareness among the masses. They also lay down lot of guidelines for small scale producer's traders, consumers and other stakeholders. The association is headquartered in Geneva.

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.

Gold-A Precious Metal as Investment
Gold enjoys innumerable advantages over other metallic forms. Platinum investment is very risky and moreover it is not easily convertible to cash. If you take the case of silver, it does not enjoy huge prospects in terms of financial gain. Moreover silver occupies lots of space when compared with gold and so you it can cost you more for transporting. This should sound out to be worthless propositions given the monetary benefits are not promising.

Factors to be considered before Investing in Gold
You need to be very careful about investing in gold because unlike stock or other markets you don't have the option of investing a small amount. You must do lot of research and have a strong knowledge about the market information. You must decide how you are going to allocate it in the portfolio. Some investors choose to invest only in gold and not in any other sources. However this practice won't be suitable for all. Therefore you must first check up if you are falling under this category. Some other issues that are to be considered are as follows:

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.

Spice Jet Ltd denies acquisition offer

SpiceJet Ltd has not been formally approached by any party for acquisition talks, the low-cost carrier said in a statement to the stock exchange on Friday.

The Mint newspaper reported on Friday the Anil Dhirubhai Ambani Group was in talks to acquire the airline, leading the shares up 14.49 percent to 35.95 rupees in a weak Mumbai market.

Inflation climbs to 8.24%

Inflation surged to 8.24 per cent for the week ended May 24 from 8.1 per cent in the previous week, despite fall in prices of some essential commodities like fruits, vegetables and spices.
Wholesale prices-based inflation stood at 5.15 per cent a year ago. The rate of price rise is expected to advance further after two weeks, when the June 5 increase in prices of petrol, diesel and cooking gas would be taken into account.

During the week ending May 24, non-food articles, raw rubber, raw cotton and groundnut seeds became expensive by 1-2 per cent.

Earlier this week the government had raised the prices of fuel - petrol by Rs 5 per litre, diesel by Rs 3 per litre and LPG by Rs 50.

While admitting that 'inflation is a problem', Finance Minister P Chidambaram exuded confidence that India would be able to maintain it's growth trajectory, and also bring about price stability with 'people's support'.

Thursday, June 5, 2008

Railways examining further cuts in freight rates

The Railway Minister, Mr Lalu Prasad Yadav, said that the Railways was examining the possibility of further reduction in freight rates to leverage its competitiveness over road transportation in the wake of the latest hike in diesel prices.

These further reductions, if any, are likely to be aimed at attracting incremental traffic in those routes where rail capacity is currently unutilised.

Discounts
In a statement, Mr Prasad reiterated the steps taken earlier this year wherein General Managers of all Zonal Railways were allowed to grant up to 50 per cent discount, as against the earlier 30 per cent, for loading of essential commodities like cement, foodgrains, fertilisers, etc in the empty flow direction.

Further reduction in freight rates is also being examined keeping in view the competitive position of the Railways in the transport market to attract more traffic and increase earnings, the Minister added.

The move is in line with Railways’ strategy during last few years wherein it increased freight tariffs through various surcharges for long distance movement of bulk commodities (like ores and minerals) which do not have road transportation as a financially viable option.

Meanwhile, Railways offers discounts only for incremental traffic in those routes where train and track capacity is available and for those industries that prefer road transport. Railways offers discounts on those routes (empty flow direction) where it is unable to garner any traffic earnings.
He said Railways will not pass its additional financial burden on its users – both passengers and freight customers. Railways consumes 2.27 billion litres diesel per annum and an increase in the price of diesel by Rs 3 per litre would cost Rs 681 crore annually and Rs 560 crore for the remaining 10 months of the current financial year.

Oil marketing stocks tumbles despite hike in price

Oil marketing stocks slips on Wednesday as investors liquidated their long positions in these stocks even after the announcement of the oil price hike. The BSE Oil & Gas index shed 353 points or 3.39 per cent from the previous day’s close, while the Sensex was down 2.81 per cent.

Mid-session
Until mid-session though, the BSE Oil & Gas index was among the best performing indices as it was up by almost two per cent. As soon as the Government announced the fuel price hike the share prices of oil marketing firms surged more than 5 per cent.

Public sector oil marketing firms such as BPCL, HPCL and IOC witnessed the highest rise. At their intra-day highs, (immediately after the Government announcement), BPCL was trading at Rs 371, IOC at Rs 452 and HPCL at Rs 256.

Private oil firms, both in production and refining, also surged till a little past mid session, in anticipation of the price rise. Cairn India, Essar Oil, Reliance Industries and Reliance Petroleum saw a lot of buying in the early part of the day. “The market had been anticipating an increase in fuel prices which is why we have been seeing a run up in these stocks in the past few days until today afternoon”, said the head of research at a stock broking firm.

However, an hour or so after the Government announcement, oil and gas stocks were seen headed southward. At close of trading, IOC was down 3.61 per cent at Rs 418.2. BPCL shed 7.84 per cent to close at Rs 324.05. HPCL fell three per cent, Aban Offshore tumbled by Rs168.75 to end the day at Rs 3,503.05, Reliance Industries fell Rs 99.6 to close at Rs 2307.2 and Essar Oil closed down 7.24 per cent at Rs 231.20.

“There was a lot of build up in these stocks in the last 10 days in anticipation of the fuel price hike. After the announcement these investors were booking their profits at higher levels. The overall market sentiment was negative, so that investors who wanted to book profits sold off their positions in these stocks”, said Mr Rohit Nagraj, an Oil & Gas analyst at Angel Broking.

Outlook
Market men say that after the announcement brokers had been advising their clients to reduce their long positions in the oil marketing stocks. “Even though the prices have been hiked, these companies will still be running at a loss. With the price rise only the extent of the losses will be reduced,” said Mr Alex Mathew, Head Research Centre, Geojit Financial Services.

People were expecting something for the private oil marketing companies as well, but nothing was announced today which is why the share prices of these stocks also dipped, said analysts.

ONGC was the sole gainer among the stocks in this sector, as well as the in Sensex. The stock was trading positive the entire day and closed at Rs 887.05, gaining 5.31 per cent from its previous close. It touched an intra-day high of Rs 912. “The package announced by the Government is between neutral and positive for ONGC. The subsidy burden of the company will reduce now”, said Mr Sanjay Someshwar, a sub-broker with Ventura Securities.

The fuel price hike, though positive for oil marketing companies, is not a long lasting solution unless crude oil prices come down substantially say analysts. “These companies still continue to depend on oil bonds and upstream companies for their profitability. Also, if crude oil prices come down, a rollback of prices is also not ruled out”, said Mr Dikshit Mittal Research analyst, Religare Securities.

Communist and Marxist against Oil price hike

Opposing any move to hike petrol prices, the Communist Party of India (Marxist) on Wednesday asked the government to impose a ‘windfall profit tax’ on private and joint venture oil firms as well as private refineries and not burden the common people.

“In no case can the UPA government pamper the private oil companies to make windfall profits and, at the same time, increase the price of petrol and diesel and burden the people further when they are suffering from steep price rise of essential commodities,” CPI(M) Polit Bureau said in a statement. The CPI also opposed any move of the government to increase prices of petroleum products.

It recommended the imposition of ‘windfall profit tax’ on private and joint venture oil-producing firms as well as private standalone refineries “earning huge profits through import parity policy of pricing.” With crude prices exceeding $100 per barrel, “it is necessary that windfall gains be recovered from all private and joint venture oil-producing companies like M/S Cairns, Reliance, Essar etc. extracting oil and gas in India,” the statement said.

It added that when these contractors participated in the New Exploration Licensing Policy, “none of them could have envisaged crude prices beyond $30 a barrel.”

“It would be a failure on the government’s part to allow upstream contractors additional gain of $70-80 per barrel without any extra work,” the party said, adding that many other countries had renegotiated their contracts with a threat of imposing windfall taxes on such profits.

“It is time that the government takes charge and recovers unintended gains from upstream contractors,” it said. The CPI(M) said private refineries were allowed “to keep margins for refining cost exceeding $15 USD per barrel, while public sector firms struggled to meet their financial needs.”

CPI National Secretary and MP D. Raja said any hike in prices of petrol and diesel would break the backbone of common people who are already reeling under the burden of runaway inflation and high prices of essential commodities.

He reiterated the demand of the Left parties for rationalisation and restructuring of excise and customs duty on petrol and diesel which were as high as 32 and 54 per cent respectively.

Mr. Raja said instead of hiking prices of petroleum products, the Finance Minister should tax the corporate sector.

Sunday, June 1, 2008

Means for Investing in Real Estate

After knowing about the basics of Real estate investment in the previous post, its time to learn the means for investing in real estate. It is not easy to obtain funds from banks or other financial institutions for investing in real estate. Some of the financial bodies do not even recognize real estate as an industry because the whole concept has been recently developed. Some of the fraudulent practices adopted by real estate agents and traders are also attributed to this cause.Some of the means of investing are as follows:

Down Payment
Down payment refers to the method of settling the whole transaction in by paying at a stroke. If you have adequate resources you may choose to go for down payment. However you must keep in mind that the purchase should not exhaust your funds completely. You will later have a difficult time in maintaining it and may even be forced to sell it at a price quoted by the buyer even if it means low profits.

Hire Purchase
If financial resources are your constraint you may choose to buy the properties by using hire purchase method. However this method has got other limitations.The terms of some hire purchase agreements may be too stringent and some will even ask you to return the property if you are not able to pay the stipulated amount in time or rather impose heavy penalty in the form of heavy interests.

Invest only after Analyzing Market Conditions (real estate boon)
The real estate market is highly fluctuating like the stock market. You must have a strong knowledge of the market information before making any investments. It is better to invest in places that are less explored but where the chances of new ventures are very bright.If you decide to invest in an overcrowded place you will have to face severe competition and no amount of marketing strategies can help you to make profits like in an unexplored place.

Buy Land for a Cheap Price and Negotiate
The art of making profit is a real estate lies with this. Your investment on landed properties should be less whereas your investments on other assets like land and furniture should be high. This way when the price of the land increases you will automatically be able to make profits. When you invest more on other assets their cosmetic value will bring more consumers.

Real estate investment is becoming very popular all over the globe. There are lots of professionals in this area of investment and exclusive studies are conducted to understand the latest trends. The only caution to the aspiring investor is that he should not be carried away like what happens in a stock market. Similarly real estate is not an easy place to make money and hence investors should calculate well before investing in real estate. They can start with by collecting information on creative real estate investing, real estate residential investment, real estate investing training and commercial real estate investing. Real estate investing e-books also help them by providing certain information on real estate.

Real Estate Investment

What is real estate investment
Real estate is basically defined as immovable property such as land and everything permanently attached to it like buildings. Real property as opposed to personal or movable property is characterized by the right to transfer the title to the land whereas title to personal property can be retained. The investment in real estate essentially depends on the risks associated with it, that is to say, even if the venture succeeds when the future stream of income will accrue to the investor and the alternative investment opportunities. Real estate investment can be attractive if viewed as a business opportunity; it can generate rental income, using it as collateral to secure a loan for a business venture, to offset otherwise taxable income through cash savings on tax-deductible interest rate losses, or simply from the profits garnered from its resale. Notable, in this context is the gains reaped by real estate speculators who trade in real estate futures (by buying and selling purchase options).

Common examples of real estate investment are individuals owning multiple pieces of real estates one of which is his primary residence and others are occupied by tenants from where the rental income accrues. Real estate investment is also associated with appreciation in the value of property thereby having the potential for capital gains. Tax implications differ for real estate investment and residential real estates. Real estate investment is long term in nature and investment professionals routinely maintain that ones investment portfolio should have at least 5%-20% invested in real estate.

A Real Estate Investment Trust (REIT) is a corporation or body investing in real estate that has the property to reduce or eliminate corporate income taxes. In return, REIT’s are required to distribute 90% of their income among the investors. These incomes are often taxable. REIT’s provide a similar function as does Mutual Funds provide for stocks in the share market. The key statistics to study about the REIT’s are the NAV (Net Asset Value) and AFFO (Adjusted Funds From Operation).

Real estate investment has attracted lot of people. The prospects are increasing day after day. At the same time it needs to be understood there are lot of risks in the real estate market. Real estate market has the same hype of a stock market. Therefore you should be very careful in making your investments. Some of the tips mentioned below will be helpful to you in this regard.

How to Invest on Real Estate
You should not follow the principles of investing in a stock market for a real estate market. In a stock market you generally take wild risks and invest blindly on the basis of some speculations. When you are planning to enter the real estate market you must have adequate cash at all times because the investment is very huge and moreover the returns are generally reaped in the long term. Similarly you will have to posses adequate reserves to maintain the properties for a considerable period of time. This is a prerequisite when it comes to real estate investment. You must carefully consider these factors before investing in real estate.

Have an idea on your Budget (Self Determination)
You must have a clear idea of how much you are going to spend and the rate of expected returns. You can approach your financial consultant for more guidance.The budget should not only reflect on the actual and anticipated revenues and outlays but also substantiate how you will meet unexpected situations because the long term financial implications are not always predictable. Even if they are predicted they won't stand true by all means.

Investment on a Prime Property
A prime property is called so by nature of its location and marketability for e.g. in the heart of the city and is easily accessible to all and has all basic facilities nearby like transport and restaurants and above all priced at a very high rate. If you are planning to invest in a prime property you must possess adequate resources to purchase and maintain it.

Commercial Area
The prices of prime properties in commercial areas are always on the rise. This upsurge is mainly due to the increasing economic activities and business transactions all over the globe. You need to be extremely cautious because many sellers try to woo real estate agents and buyers by making unrealistic promises and inflating the prices. Therefore unless you are confident that a prime property in a commercial locality can fetch you the income it is not advisable to invest.

Investment on a Non-Prime Property
Non prime properties are those which are not located in principal centers and are promising in terms of business opportunities. You need to give equal importance to non prime properties because a non prime property may become a prime property later by virtue of many factors like sudden demand, or some other resources available in the place.

Residential Area
Properties in residential areas also show an upward trend with regards to increase in price. However it is not profitable to invest in these because you may be able to gain profits only in the long run. Short term profits will only be marginal. Moreover the returns may not be definite as the prices of residential properties may not even increase over a period of time.

DRIP or Dividend ReInvestment Plan

A dividend reinvestment plan (DRIP) allows shareholders to reinvest their dividends in additional stock rather than receiving them in cash. These plans are offered directly by companies or through agents acting on behalf of the corporation. In the former case, a company issues new shares in lieu of a cash dividend.

You also have the option of purchasing additional shares from the company. The advantage is that you pay no brokerage fees, although some companies charge fees for this service. The other type of plan is offered by agents, such as banks, that collect the dividends and offer additional shares to shareholders who sign up for the plan. The bank pools the cash from dividends and purchases the stock in the secondary market. Investors are assessed fees that cover the brokerage commissions and the fee charged by the bank.

Advantage of DRIPs
The advantage of DRIPs to shareholders is that they act as a forced savings plan; dividends are reinvested automatically to accumulate more shares. This method is particularly good for investors who are not disciplined savers.

Disadvantage of DRIPs
A disadvantage of dividend re-investment plans is that shareholders need to keep, for tax purposes, accurate records of the additional shares purchased. When additional shares are sold, the purchase price is used to determine whether there is a capital gain or loss.

These dividends are considered taxable income whether they are received in cash or reinvested automatically in additional shares. Another disadvantage of DRIPs is that the fees charged to participate in the program can be high.

How is Investing different from Saving

In simple economies, there is little distinction between savings vs investments. Saving and investing are two unique concepts, and it's important to understand the difference between them. One saves by reducing present consumption, while he invests in the hope of increasing future consumption. Therefore, a fisherman who spares a fish for the next catch reduces his present consumption in the hope of increasing it in the future.

Most of the people probably have savings accounts with ATMs to access their hard-earned cash and be able to store away any extra cash in a place a little safer than a mattress. A few of you may even have some stocks or bonds. Let me explain why while a savings account in the bank may seem like a safer place than the mattress to store your money, in the long-term it is a losing proposition!

If you open a savings account at the bank, they will pay you interest on your savings. So you think that your savings are guaranteed to grow and that makes you feel extremely good! But wait until you see what inflation will do to your investment in the long-term. The bank may pay you 5 percent interest a year on your money, if inflation is at 4 percent though, your investment is only growing at a mere 1 percent annually.

In order to achieve the best possible results, it's crucial that you match your saving or investing goals with the proper financial tools. Saving and investing are often used interchangeably, but they are quite different and is essential to know the key differences.

Saving
Is storing money safely, such as in a bank or money market account, for short-term needs such as upcoming expenses or emergencies. Typically, you earn a low, fixed rate of return and can withdraw your money very easily.The risk for savings are often lower than for other forms of investment. Savings are also usually more liquid. That is, you may quickly and easily convert your investment to cash.

Investing
Taking a risk with a portion of your savings such as by buying stocks or bonds, in hopes of realizing higher long-term returns. Unlike bank savings, stocks and bonds over the long term have returned enough to outpace inflation (roughly 10%), but they also decline in value from time to time so the risk factor for investing is generally higher then savings.

Investments may produce current income while you own the investment through the payment of interest, dividends or rent payments. When you sell an investment for more than its purchase price, the profit is known as a capital gain, also called growth or capital appreciation.

The decision about which investment to choose is influenced by factors such as yield, risk, and liquidity.

What is Investing

Value of investing
No matter what the current stage of your life is, the direction you are heading or what the future holds for you, investing will be a key factor in developing both your financial security and your financial freedom. Whether you are purchasing a house, a car or even beginning a business, investing is inevitably something that everyone should undertake throughout their lives for the benefit of themselves and future generations.

Factors
There are many factors involved in investing and why it is done. Many of these factors are related to individuals and their own specific personal situation, objectives, the current period their of lives and their investing personality. These factors can be discussed with a financial planner who can look at your own personal situation and advise on the four main areas:

  • Wealth creation - Superannuation, Negatively geared shares, Property
  • Asset protection - Insurances - Life, Health, Property, Professional, Income protection and Key personnel
  • Retirement planning - Retirement income provision, Tax
  • Estate planning - Disposal of assets - during life, on death, willed assets, non-estate assets


While it is not essential to understand all these areas, it is important to realize that they are fundamental in ensuring that your financial future remains economically stable and has the potential to grow to where you want it to. The most important realization by visiting this web site is that investing is, or will, be fundamental to your life and by even reading this section you have taken the most important step - the first.

Trading Rules

Some useful tips for you before you invest in the market. These are general trading tips which everyone should know

1. Don't blame the market. You must take responsibility for your financial security and all of your actions.

2. Study and learn all you can. Choose one market to trade, BSE or NSE, and become an expert in your area.

3. Be prepared for problems. Have a back-up phone ready with your brokers information in case of problems.

4. Have a notepad, pencil and calculator at hand to record trades.

5. Know the days and times when economic data is released.

6. Never let a winning trade turn into a loss.

7. Start with a little capital. Only place small stakes or paper trade if you are relatively new to trading.

8. Have a trading strategy and stick to it. It is no good saying one thing and doing another.

9. Always keep records of all your trades. Analyse these weekly or monthly to see if you can improve you performance.

10. Don't be greedy. You can soon build up considerable wealth with just 1% daily profits.

11. Never trade if you are tired. Any medications that could affect your responses or you have a headache or you are worried about something.

12. Wherever possible always try and obtain value when placing a bet.

13. Never trade on tips or what experts say. Invariably throughout the day there will be several experts with opposing views. Trade what you see happening.

14. Vary your stakes. If market movement is a little slow use lower stakes.

15. Look for reversals in the market and trade with this new trend.

16. Do not over trade.

17. Try to make a small profit every day and be happy with that.

18. Don't let the market get away from you. As soon as you can get out.

19. If you are losing just get out.

20. If in doubt GET OUT!