Some people are in the habit of accumulating cash upon cash to be kept in some hidden place or safe box at home. This is their way of guaranteeing that they don’t lose their money. What they fail to realize is that such storing at home can’t really offer a foolproof guarantee if the house is robbed or caught on fire. Besides, earning zero returns of their money is the same as moving backwards because the longer they keep their money with them, the more that money’s value goes down. This is because of the problem of inflation. Let’s say, if the average inflation rate over a period of five years is 4.5% , the purchasing power of a Rs 25,000 cash kept at home today will come down to Rs 20,548.18 after five years, which is a lot worth less. A savings account is a step up. With a savings account in a bank, your money will be fairly safe and you’ll be lucky if you get 4% on it. For that matter, even at 4% earning on interests, you will be losing your money’s value if the average inflation rate is 4.5%. In the meantime, the bank will gladly take your Rs 25,000 and invest around 80% of that amount in some mutual funds, which could give them a yield of at least 10 percentage points. This, of course, is how the bank can make money with your money. Not only that, after you open that new account, the bank will charge you anopening fee (Rs 500) and an annual fee (Rs 500) for its services. Also, they could offer a credit card with a line of credit, which is an easy way to borrow their money up to a specified limit. But the catch is this: the bank could charge you an interest rate of 10 - 18%, as opposed to just 4% when they take your money. The next step up to a savings account is called a Certificate of Deposit (CD)--- that is, a CD will give you a higher rate of return than a standard savings account. For example, if you deposit your money in a CD, you get a guaranteed rate of return---about 5% in most cases---but you can’t take out that money until the maturity date, which could be a five-year period. If somehow you prematurely withdraw it, you will end up paying all sorts of fees and penalties. Even without the fees, though, a 5% rate of return is barely enough to keep up with inflation. If you are serious about investing, you must consider buying bonds, which is a little risky but within reasonable limit. A bond is an IOU, a debt instrument by which a company owes you money. When you purchase a bond from a private company, that company takes your money in exchange for their promise of paying you an interest rate (anywhere from 6 - 8%) and the initial principal amount at a specified future date. Some bonds have short terms, such as a few months, while others have terms as long as 30 years. The interest rate on a bond depends, in part, on its term. Long-term bonds are riskier than short-term bonds because holders of long-term bonds have to wait longer for repayment of the principal. To compensate for this risk, long-term bonds usually pay higher interest rates than short-term bonds. The second important determinant of the interest rate is tied to the performance of the company. If the company’s performance is not good, there is a probability that the company (borrower) could fail to pay some of the interest or principal. So, when bond buyers perceive that such a probability of default is high, they will demand a higher interest rate to compensate them for this risk. By contrast, bonds issued by the government pay a lower interest rate because government bonds are more secured. After all, for a government to default would mean that the entire economy has fallen apart, which is unlikely. While companies’ sale of bonds to raise money from people is called debt finance, the sale of stocks is called equity finance. For example, when the computer chip-maker Intel Corporation needed to raise funds to build a new factory, it issued a number of shares for the public to buy. Let’s say, if Intel sold a total of 100,000 shares of stock, then each share represents ownership of 1/100,000 of the business firm. This is because stock represents ownership in a firm and is, therefore, a claim to the profit that the firm makes. As such, if the firm’s value skyrockets, the value of each share also goes up exponentially. Likewise, there are many other examples of stock sales and/or purchases from companies such as Tata Group, Oil and Natural Gas Corporation, Reliance Industries, Infosys, ICICI Bank, Sun Pharma, Lupin, and many more … from which millions of Indians have made lots of money. In India, there are 24 stock exchanges as of 2015. Of these, the biggest ones are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). These are platforms where business transactions can be facilitated for stock buyers and sellers without meeting at a physical location. To buy stocks, or sell stocks you already have but don’t want anymore, all you need to do is get the help of a stock broker. Also, today most brokers provide Internet-based trading facilities so that their clients can buy or sell stocks themselves using the Internet from any place they’d like. So, if you want to get some return on a pile of money you don’t need today, consider investing in stocks and bonds.
