@Leisure - Vol-1 | srei
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@Leisure - Vol-1

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Tulip Mania

When Netherlands was gripped in Tulip fever

A speculative futures contract is a trading behavior in which the buyer and seller enter an agreement for sale of an item at a future date at a pre-decided price. In most cases, the buyer doesn't intend to take the delivery of the item but wishes to profit from the increase in price during that period whereas the seller profits if the price decreases.

A bubble is a phenomena when prices of a particular item irrationally rise without its worth being anything close to the price. The prices rise steeply in a short period and then suddenly fall leaving investors holding huge losses.

In the 1630s, Netherlands was gripped by a fever known as Tulip Mania where people throughout the country suddenly went berserk investing in tulip bulbs, with the intention to make profits, pushing the prices of the bulbs to unprecedented heights. The bulbs were traded in local stock exchanges wherein the buyers and sellers entered into future contracts expecting the prices of the bulbs to continuing rising.

People mortgaged their houses and lands etc., to invest in tulips. Houses were sold for a few tulip bulbs and a single bulb exchanged hands 20 times in a day, each time at higher price.

Finally the situation became difficult when some buyers refused to show up and honor their future contract. Soon panic spread among investors resulting in the price of tulips crashing to rock bottom. The craze for bulbs soon evaporated, leaving many high and dry.

Moral: Avoid investment fads and investment 'opportunities' whose prices rise steeply over a very short period of time.

 
 

NCDs

 are safer than equity.

Whenever a corporation or a company wishes to borrow to fund its business activities, it issues a debt instrument called debentures. These debentures have a fixed tenure and investors are paid pre-determined interest rates on it. It is a debt to the company with the bond holder being the lender. Debentures are of two types: convertible and non-convertible, the point of difference between the two types being the provision of converting into company stocks or equities. Convertible debentures, as the name suggests, can be converted into equities whereas non-convertible debentures cannot be converted into equities.

While discussing Non-Convertible Debentures (NCDs) a question often asked is - how safe it is in comparison to equities. NCDs are safer than equities. Here's why-

NCDs offer fixed returns: The rate of returns on a NCD is pre-determined and fixed unlike in equities where the returns are dependent on the company's performance, the economy and market factors, and hence, can be volatile. For instance, a NCD offering 10% interest will pay you interest at this rate every year till the maturity of the debenture; as against this, there is no guarantee on returns for equities.

NCDs get priority over equities during liquidation: When a company becomes bankrupt, it goes into liquidation. During the process, the assets of the business are sold to pay off the creditors. Since NCDs are debts of a business, NCD holders are given priority over others and hence, their money is much safer.

However, it is important to pick the right company while subscribing to NCDs. Capability to repay and credibility of the company are keys to security of your money. Agencies like CRISIL or CARE rate companies on various parameters which you can use to check for their credibility.

Srei Infrastructure Finance Ltd. has consistently earned higher ratings from various prominent agencies and offers various choices in NCDs. The company's focus in priority sectors like infrastructure lending with interests in equipment finance and project advisory, and over 24 years' of experience, give its offering high credibility.

Moral: Avoid investment fads and investment 'opportunities' whose prices rise steeply over a very short period of time.

 
 

Bond prices

are impacted by interest rate movements

When governments, public and private corporations raise loans, they issue bonds. Bonds pay the holder a fixed amount of interest at a specified date and at a fixed rate, which is called coupon rate. However, investing in bonds is not as simple as it looks. There are several factors that affect the bond prices. One such factor is movement (rise and fall) of interest rates.

Bond prices and interest rate movements share an inverse relationship, i.e. an increase in interest rates causes bond prices to fall, and vice versa. However, you should remember that if you hold the bond till maturity, you will receive the pre-determined value of the bond. The change in bond prices due to increase/decrease in interest rates will affect you if you wish to sell the bond.

How it Works

Let's assume that you buy a bond of Rs 10,000 with a coupon rate of 8% for a maturity period of 10 years. So, you will get 8% of Rs 10,000 i.e. Rs 800 every year. If the current interest rate is 6%, your investment is profitable. Now say after 3 years, the interest rate moves up to 9%. Will your bond remain attractive now? No. Will anybody be interested in buying it, if you wish to sell it? No, as all bonds available in the market then will have higher coupon rate making them more attractive. So, you have to reduce the price of your bond to sell it. This is how rise in interest rates decreases the price of bonds.

Now assume that the interest rates after 3 years from now fall to 4%. Is your bond attractive now? Yes. Will you get buyers for it? Yes; many will be interested and you can sell your bond at a higher rate.

 

Buddy Jokes

  • Being retired is like not knowing what day it is, what time it is, where you're suppose to be, or what you're suppose to be doing. Just like working for the government.
  • A Motivational Poster: Hang in there: You are only 30 years away from Retirement!
  • The market is strange; each time one guy sells and another one buys it, and they both still think they're smart.
  • A long term investment is also known as a failed short term investment!