Category Archives: Finance

Compounding Interest Simplified

Compounding Interest

Advertisements

GOLD: Its Importance in an investment decision.

For thousands of years Gold has been a pillar of tangible, storable and transportable wealth. Gold has always been a staple of global currency, a commodity, an object of beauty and an investment. During the late 80s and 90s financial markets rapidly developed and liquidity poured into stocks and mutual funds at an alarming rate. Gold, during this economically robust period, fell out of favor as the “safe haven” or “flight to quality” asset that it was through the 70s and early 80s when it was used as an inflation hedge. In recent years there has been a major resurgence in interest and investor demand in gold as an alternative asset class to paper based investments, the failing US dollar and even Real Estate. The current price rally from Gold’s turn-of-the-century lows to its current levels has clearly awoken awareness about the shiny yellow metal. There are many reasons, both fundamental and psychological, that individuals as well as institutions around the globe are once again becoming very serious about investing in hard gold. In this column we will examine some of the more fundamental reasons investors are looking again at gold, examine the psychology of today’s market and then, based on the data, you can decide if you should convert some of your paper savings to hard Gold…

GOLD: Its Importance in an investment decision.

GOLD: Its Importance in an investment decision.

Why are investors running for Gold?

Risk Reduction:

Gold is unique in that it does not carry a credit risk. Gold is no one’s liability. There is no risk that a coupon or a redemption payment will not be made, as for a bond, or that a company will go out of business, as for an equity. And unlike a currency, the value of gold cannot be affected by the economic policies of the issuing country or undermined by inflation in that country. At the same time, 24-hour trading, a wide range of buyers – from the jewelry sector to financial institutions to manufacturers of industrial products – and the wide range of investment products available, including coins and bars, make liquidity risk very low. The gold market is deep and liquid, as demonstrated by the fact that gold can be traded at narrower spreads and more rapidly than many competing diversifiers or even mainstream investments.

Gold and the dollar

Gold is often used as an effective hedge against fluctuations in the US dollar, the world’s main trading currency. If the dollar appreciates, the dollar gold price falls, while a fall in the dollar relative to the other main currencies produces a rise in the gold price. While this may also be true of other assets, gold has consistently proved among the most effective in protecting against dollar weakness.

Gold and Inflation:

Market cycles may come and go, but – over the long term – gold keeps its purchasing power. Its value, in terms of the real goods and services that it can buy, has remained remarkably stable. In contrast, the purchasing power of many currencies has generally declined due to the impact of rising prices for goods and services. As a result, gold is often bought to counter the effects of inflation and currency fluctuations. Investors in gold can point to a growing body of research supporting gold’s reputation as a protector of wealth against the ravages of inflation. In the short run, experience has shown that gold can deviate from its long-run inflation-hedge price.

 Portfolio Diversification:

Asset allocation is an important aspect of any investment strategy. By balancing asset classes of different correlations, investors hope to maximize returns and minimize risk. However, while many investors may believe that their portfolios are adequately diversified, they typically contain only three asset classes – stocks, bonds and cash. There are a wide range of reasons and motivations for people and institutions seeking to invest in gold. And, clearly, a positive price outlook, underpinned by expectations that the growth in demand for the precious metal will continue to outstrip that of supply, provides a solid rationale for investment. Of the other key drivers of investment demand, one common thread can be identified: all are rooted in gold’s abilities to insure against uncertainty and instability and protect against risk.

Source:christianpost

The Multiplier Effect: Its effects on an Economy!

The multiplier effect

Every time there is an injection of new demand into the circular flow there is likely to be a multiplier effect. This is because an injection of extra income leads to more spending, which creates more income, and so on. The multiplier effect refers to the increase in final income arising from any new injection of spending.

Image

The size of the multiplier depends upon household’s marginal decisions to spend, called the marginal propensity to consume (mpc), or to save, called the marginal propensity to save (mps). It is important to remember that when income is spent, this spending becomes someone else’s income, and so on. Marginal propensities show the proportion of extra income allocated to particular activities, such as investment spending by UK firms, saving by households, and spending on imports from abroad. For example, if 80% of all new income in a given period of time is spent on UK products, the marginal propensity to consume would be 80/100, which is 0.8.

The following general formula to calculate the multiplier uses marginal propensities, as follows:

1/1-mpc

Hence, if consumers spend 0.8 and save 0.2 of every £1 of extra income, the multiplier will be:

1/1-0.8

= 1/0.2

= 5

Hence, the multiplier is 5, which means that every £1 of new income generates £5 of extra income.

The multiplier effect in an open economy

As well as calculating the multiplier in terms of how extra income gets spent, we can also measure the multiplier in terms of how much of the extra income goes in savings, and other withdrawals. A full ‘open’ economy has all sectors, and therefore, three withdrawals – savings, taxation and imports.

This is indicated by the marginal propensity to save (mps) plus the extra income going to the government – the marginal tax rate (mtr) plus the amount going abroad – the marginal propensity to import (mpm).

By adding up all the withdrawals we get the marginal propensity to withdraw (mpw). The multiplier can now be calculated by the following general equation:

1/1- mpw

When to refer to a ‘multiplier effect’

The multiplier concept can be used any situation where there is a new injection into an economy. Examples of such situations include:

  1. When the government funds building of a new motorway
  2. When there is an increase in exports abroad
  3. When there is a reduction in interest rates or tax rates, or when the exchange rate falls.

The downward  or ‘reverse’ multiplier

A withdrawal of income from the circular flow will lead to a downward multiplier effect. Therefore, whenever there is an increased withdrawal, such as a rise in savings, import spending or taxation, there is a potential downward multiplier effect on the rest of the economy.

 

source: .economicsonline

One Idiot – An IDFC Foundation Initiative to educate the youth of India to be financially independent.

This Short movie will definitely blow your mind, your way of looking at “Money” and “Wealth”. It teaches how One can become Wealthier with some simple rules !! It’s simply awesome!

Five Reasons that Buy and Hold is Better than Trading for Small Investors

What’s Crude? Difference between WTI, Brent, OPEC Crude Oil and How it affects our Economy:

Crude oil prices measure the spot price of various barrels of oil, most commonly either the West Texas Intermediate or the Brent Blend. The OPEC basket price and the NMEX futures price are also sometimes quoted.

Crude  Oil, WTI, Brent, OPEC Crude Oil

West Texas Intermediate (WTI) crude oil is of very high quality, because it is light-weight and has low sulphur content. For these reasons, it is often referred to as “light, sweet” crude oil. These properties make it excellent for making gasoline, which is why it is the major benchmark of crude oil in the Americas. WTI is generally priced at about a $5-6 per barrel premium to the OPEC basket price and about $1-2 per-barrel premium to Brent.

Brent Blend is a combination of crude oil from 15 different oil fields in the North Sea. It is less “light” and “sweet” than WTI, but still excellent for making gasoline. It is primarily refined in Northwest Europe, and is the major benchmark for other crude oils in Europe or Africa. For example, prices for other crude oils in these two continents are often priced as a differential to Brent, i.e., Brent minus $0.50. Brent blend is generally priced at about a $4 per barrel premium to the OPEC Basket price or about a $1-2 per barrel discount to WTI.

The OPEC Basket Price is an average of the prices of oil from Algeria, Indonesia, Nigeria, Saudi Arabia,Dubai, Venezuela, and Mexico. OPEC uses the price of this basket to monitor world oil market conditions. OPEC prices are lower because the oil from some of the countries have higher sulphur content, making them more “sour”, and therefore less useful for making gasoline. The NYMEX futures price for crude oil is reported in almost every major U.S. newspaper.

It is the value of a 1,000 barrels of oil, usually WTI at some agreed upon time in the future. In this way, the NYMEX gives a forecast of what oil traders think the WTI spot price will be in the future. However, the futures price usually follows the spot price pretty closely, since the oil traders can’t know about sudden disruptions to the oil supply, etc.

How Crude Oil Prices Affect the U.S. Economy:

Higher crude oil prices directly affect the cost of gasoline, home heating oil, manufacturing and electric power generation. How much? According to the EIA, 96% of transportation relies on oil, 43% of industrial product, 21% of residential and commercial, and (only) 3% of electric power. However, if oil prices rise, then so does the price of natural gas, which is used to fuel 14% of electric power generation, 73% of residential and commercial, and 39% of industrial production. (Source: EIA, U.S. Primary Energy Consumption by Source and Sector, 2004)

How Crude Oil Prices Affects You:

For this reason, higher oil prices increase the cost of everything you buy, especially food. That’s because a lot of food costs depends on transportation. High oil prices will ultimately increase inflation.
Crude oil prices most directly affect you in higher gasoline prices and higher home heating oil prices (primarily for those of you who live in the Northeast U.S.) Crude oil accounts for 55% of the price of gasoline, while distribution and taxes influence the remaining 45%.

Crude Oil Price Trends:

Oil prices usually go up in the summer, driven by high demand for gasoline during vacation driving times. Sometimes it will drop further in the winter, if there is lower than expected demand for home heating oil, due to warmer weather. During 2008, there was fear that economic growth from China and the U.S. would create so much demand for oil that it would overtake supply, driving up prices. However, most analysts now realize that such a sudden increase in oil prices was due to increased investment by hedge fund and futures traders.
In addition, oil prices seem to be rising earlier and earlier each spring. In 2013, prices started rising in January, reaching a peak of $118.90 in February. In 2012, oil prices started rising in February. The price for a barrel of WTI crude broke above $100 a barrel on February 13, 2012. In 2011, prices didn’t break $100 a barrel until March 2, and didn’t peak until May at $113 a barrel.
Fortunately, none of these peaks were as high as the June 2008 all-time high, when the price of WTI crude oil hit $143.68 per barrel. By December, it plummeted to a low of $43.70 per barrel. The U.S. average retail price for regular gasoline also hit a peak in July 2008 of $4.17, rising as high as $5 a gallon in some areas. By December, it had also dropped to $1.87 a gallon.Source:about.com

Alternative Investments: What, Why and Who?

An investment that is not one of the three traditional asset types (stocks, bonds and cash). Most alternative investment assets are held by institutional investors or accredited, high-net-worth individuals because of their complex nature, limited regulations and relative lack of liquidity. Alternative investments include hedge funds, managed futures, real estate, commodities and derivatives contracts.

Alternative Investments: What, Why and Who?

Alternative Investments: What, Why and Who?

WHY ALTERNATIVE INVESTMENTS?

Yesterday’s portfolios may no longer be enough for today’s challenges. In many cases, the traditional mix of stocks, bonds and cash – the core of modern portfolio theory – has proven more correlated than not in the new global economy.

ALTERNATIVES CAN CAN OFFER OPPORTUNITIES IN TODAY’S ENVIRONMENT 

  • Alternative investments offer the ability to extract better
    relative returns with less correlation to the markets
  • Market dislocations and regulations are creating opportunities
    across the spectrum of alternatives
  • In some instances, investors need to expand their investment
    horizon to capture an illiquidity premium
  • A well constructed, diversified portfolio of alternatives can provide
    attractive risk-adjusted returns with downside and inflation protection
    and less correlation to traditional market indices.

ALTERNATIVE INVESTMENT CHARACTERISTICS

Non-traditional asset classes, such as hedge funds, real estate, commodities and private equity, follow different rules than equities and bonds. This is precisely why they can help improve a portfolio’s risk/return profile.

  • Risk/return characteristics are above average: Non-traditional investments can offer above-average returns with comparatively low volatility.
  • It pays to adopt a longer investment horizon: Some non-traditional investments are long-term, calling for an investment horizon of several years or a holding period corresponding to the length of an economic cycle.
  • Stability for the portfolio: Because returns on non-traditional investments depend upon different facts than those influencing traditional instruments, they have a balancing effect on a portfolio.
  • Know-how makes the difference: Many non-traditional strategies and investments require solid specialist know- how, excellent market expertise and many years of experience. For this reason, manager selection is critical.

courtesy:montage investments

%d bloggers like this: