Let your money talk

In the present times, saving the right amount of money alone does not matter. But choosing the right investment option can multiply you savings more efficiently. Basically, savings and investment are two different concepts.

Let me explain. In the given culture coupled with our financial landscape, almost every one of us at our own level get into money management activity every month. We distribute our monthly income which we earn either in the form of salary or through any other means, to fund our routine expenses like food, clothing, utility bills etc. After  paying off expenses from the income, a portion of income is left and this is what we normally call, savings. The saved amount is always a reliable cushion for future needs.

In the given scenario, especially in Covid-19 crisis, money is fast losing value and prices of goods & services are going up. For example, you save Rs. 5000 every month after making expenses towards your needs. If you keep this saved amount idle, over a period of time (say one year) you would find that the saved amount would not be enough to buy you enough things as it would have facilitated you a year ago. This means money loses value over a period of time. On the other side, prices of goods and services are soaring high and faster than the pace at which the money is losing value. It’s this imbalance which necessitates you to let your money talk and get it multiplied preferably at a pace much faster than the soaring prices of goods and services.

So, if you want to negotiate your cost of living, which goes up every year, then investing your saved money into profitable investment instruments is the right way to ensure your strong financial position for future. Precisely, it’s the investment which can lend you the support you need the most for creating wealth, especially at a time when you need the money most. However, there are certain things you as an investor need to know before entering into the financial market.

What are the investment options?

In banking sector we have a lot of saving schemes which not only guarantee assured earning on your money but also ensures safety. Here you can deposit a fixed sum for a fixed period of time suiting your own time lines. During the period you will earn interest on the deposit at a fixed interest rate. There are multiple options to earn the interest on your deposits. You can choose a scheme where you are paid the interest amount on monthly basis or you can pick a scheme to get interest payment at the maturity of the scheme. You have also an option to take route of a scheme where you can deposit a fixed amount monthly for a fixed time.

Then we have capital market, in common man’s language its called share (equity) market. Here you can invest your money in equities and bonds. You can get much better returns on your investment than the banking instruments. But it’s highly risk. You can even lose your capital, if markets turn highly volatile.

What are the basic things to keep in mind before entering into the squirt market?

While entering into the equity market, work out three basic things: safety of the money invested, to get the money back as and when required (liquidity) and highest return on their investment. In this market, returns on investment are high, but so are the risks associated with your investment. However, you can mitigate these risks by investing in variety of stocks. This means, distribute your money among a variety of stocks/ shares that may rise and fall at different times. This way you will insulate yourself against those big “hits” that your entire investment portfolio could suffer when one class of stock is hit hard.

Over a period of time, it has been observed that local investors are taking route of ‘Future & Options’ in a bid to make quick money. What does investment in this type of investment means?

Let me first talk of a ‘Futures’ contract. It is not equity in a stock or commodity. It is a contract – a contract to make or take delivery of a product in the future, at a price set in the present.

In formalized trading of futures contracts on exchanges, standardized agreements specify price, quantity and the month of delivery. Futures markets have their roots in agriculture, but today futures and options on futures are traded on a wide range of products like natural gas to stock indexes, precious metals and currencies.

Similar to stocks, gains and losses in futures trading are the result of price changes. If you have sold a futures contract, your trade will show a profit if prices fall. If you have bought, higher prices will produce a profit. To make a profit on a futures trade you can first buy low and then sell high, or reverse the order and sell high, then buy low.

Options on futures can be thought of like insurance. An option buyer (the insured) pays a premium to an option seller (the insurance company) for the right to buy or sell a futures contract at a specific price. However, just like with insurance, the option buyer may or may not exercise his right (use his insurance).

Businesses associated with volatile prices use futures and options to hedge risks. They lock a particular price of the commodities to insulate themselves against higher or lower prices in future.

Notably, Futures and Options market also provide the economy with price discovery. Futures prices are determined by supply and demand. An exchange itself does not set prices; it simply provides a place where buyers and sellers can negotiate. If there are more buyers than sellers, the price goes up. If there are more sellers than buyers, the price goes down. The prices discovered through futures markets offer valuable economic information about supply and demand in a competitive business environment.

It’s important to note that trading in ‘Futures and Options’ is not for everyone. Futures and options markets can provide an investor the opportunity to diversify and to increase returns.

What is a margin account in investment matters?

Let me explain with an example. Suppose, you have Rs.50,000 in hand to purchase some shares of the companies from the market. While doing so, you find some more opportunity of buying some stock, but your purchasing power doesn’t allow you. It’s here the broker offers his services; lends you the required money to seize the opportunity and buy more stocks beyond your means. To do so, you are required to open a margin account with the broker.

This margin account, which is different from a trading account, will allow you to borrow money from the broker to buy stock. To use margin you must set up a margin account, which is different from a regular trading account at a broker. Notably, a margin account requires an initial deposit, also known as minimum margin, decided by the broker. In most cases you can margin up to 50 per cent stock’s price, which means, If you wanted to buy 100 shares of a company selling for Rs50 per share for a total of Rs5000 you could margin Rs.2,500 of the purchase price. In other words, you would contribute Rs.2,500, known as the initial margin, and the broker would loan you Rs.2,500.

There are certain conditions in margin trading. Your broker will charge you interest on the money you borrow. When you sell stocks bought on margin the money goes into the margin account to settle the loan to the broker. Of course it provides a way to magnify your trading power, but any missteps can be extremely costly. All stocks in your account are held as collateral for a margin loan. The margin maintenance requirement varies from broker to broker, stock to stock and portfolio to portfolio.

What is margin call?

When you borrow money to buy stocks, the broker (lender) basically wants to be sure that he gets paid back. And so, he will insist on having some sort of deposit in order to protect his loan. The problem occurs when your stock falls, and the collateral you have pledged isn’t worth what it once was.

In this situation, the broker’s money is at stake and will call you to have enough cushion by putting in additional cash, or deposit more stocks into your account. That in essence is what a margin call is.

It’s very important for you to understand margin calls. As soon as your account falls below the broker’s maintenance requirement, you will get a margin call.  If you fail to raise your account to the minimum required level, your broker can sell off your holdings without any notice.