Small Caps – Dutch Uncles

When The Market Is Up Or Down, What Does It Actually Mean?

Aakash Sharma — Fri, 03 Sep 2021 05:35:07 +0000

There are two significant parameters that experts use to weigh and analyse the state of a nation’s economic and financial health. One is the GDP – Gross Domestic Product – the monetary measure of the market value of all the final services and goods made in a specific period.

The other is the financial performance of a company’s shares – stock market indices. But, some questions arise – which companies matter in a stock market index? Are all companies included in the performance analysis of market indices? And what exactly is a market index?

Stock market index – which companies matter?

By definition, a market index is a portfolio of investment holdings representing a financial market segment. The market index value is calculated from the prices of the underlying holdings. The market index analysis helps identify if the market is up or down (and also shows the economic growth or decline). Indices are the report card of the market’s top companies’ performance in the market.

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If not the biggest by size, each sector's top and leading companies are included in making a market index.

Companies with considerable value in their respective industries are basically the ones accounted for in the analysis by a market index. For example, Indian companies with significant market shares, such as Infosys, Tata, Reliance, Hero, etc., represent the entire market in a stock market index.

It is important to note that not all companies listed on a stock exchange are included in making a stock market index. For a reference point, the Bombay Stock Exchange has 5000+ companies listed on it. Out of those 5000+, only the top 30 companies are considered based on their market capitalisation.

What is market capitalisation?

Market capitalisation (market cap) is the total market value of a company’s shares of stock. It is calculated by the product of the total number of a company’s shares and the price per equity share. In calculating the market cap, promoter shareholdings are not included.

For example, suppose Reliance (RIL) has 10,00,000 shares in the market. If out of those 10 lakh shares, 3 lakh are owned by promoters (say, the members of the Ambani family and relatives), then the market cap will be calculated only for the rest 7 lac shares and not for those held by the private promoters.

The publicly traded shares, i.e., the shares held by public shareholders, give the free-float market capitalisation. This shows that the total market cap and free-float market cap can be different.

SENSEX and NIFTY50 – The indices of the BSE and NSE

Based on the free-float market cap, the top 30 companies are shortlisted on the Bombay Stock Exchange (BSE) from different sectors. The base year for calculating the average of the companies’ points is 1978-79. The points calculation started from 100 points, and the collective standard of the top thirty companies on the BSE is called the SENSEX (S&P Bombay Stock Exchange Sensitive Index).

In the National Stock Exchange (NSE), the top 50 companies are included based on their free-float market cap to make the NSE stock market index – the NIFTY 50 index. Companies in NIFTY 50 (NSE Index) do not remain constant but keep changing as per their free-float market capitalisation.

What does it mean when the market is up or down?

Suppose the SENSEX is at 28000 points, and it falls in points to 27900. This fall of 100 points will indicate that a majority of those 30 companies are not doing well at share prices. And this is what is known as the ‘market is down’ situation. The reverse situation (a rise to 28100) will be called a ‘market is up’ situation.

When the index is down, i.e., the market is down, it indicates that companies accounted for in the index are making less profit and development. Thus people are not buying the shares or are selling the existing ones.

For a reference basis, before the 2008 financial crash, SENSEX was at a high of 21,000 points. But after the crash and recession, it came down to 8000-9000, showing a severe loss of points and top companies’ average share valuations.

Bull and Bear markets

If the market is down, it means people (investors and shareholders) are selling their shareholdings. When the index is up, i.e., SENSEX or NIFTY 50 are up, it points towards good economic growth and stock market activity.

Colloquially, it is called a bull market when the market is up, meaning that investors are buying. When the index is down, selling shares takes place faster than buying; it is called a bear market.

It is therefore clear that the stock market index is critical to see the state of a market. That is why, when the Government of India announces the national budget, the market indices witness a lot of activity. If the budget is positive for the market, then the market registers a high growth in index points and vice versa.

Interestingly, the first Index – BSE SENSEX – was first started in India in 1986 and NIFTY 50 was established in 1997. Both have been recorded continuously since then, helping investors analyse market trends, companies make profit valuations, and economists see the health of the Indian economy.

The post When The Market Is Up Or Down, What Does It Actually Mean? appeared first on Dutch Uncles.

Everything You Need To Know About Simple and Compound Interest

Anju Nambiar — Wed, 01 Sep 2021 08:35:09 +0000

Learning about the basics of simple and compound interest may seem like a silly exercise best suited for students. But knowing the basics is important for retail investors because you will get a clear picture of how doing long term investments will quadruple your revenue by manifolds. But before we can break down these seemingly complicated concepts for you, let’s get the basic definitions out of the way.

Simple Interest

SI is the amount added to a principal amount of money for a specific period.

Compound Interest

Compound Interest is calculated on the principal amount along with accumulated interest on multiple smaller periods of time.

The fundamental difference – Here’s what you need to know

The major difference between the two depends on what it’s based on.

SI is based solely on the principal amount involved for a loan or investment.
Whereas the compound interest is added on the principal amount ‘combined’ with the interest compounded for one cycle of the total period on the loan or investment. Here, the word ‘combined’ is key since ‘compound’ literally means to mix several parts or elements.

In simple words, the returns on CI are much higher than what a simple interest pays.

Understanding Simple Interest and Compound Interest in Daily Life

SI, as the name implies is simply added on to the original loan or investment amount. On the other hand, CI is ‘accumulated’ and is hence much more profitable for the lender or investor.

Whenever an interest is added to a sum, the value of the money doesn’t stay the same over time. It grows periodically, and that is precisely why these concepts are so important for an investor looking to grow their money.

Must-know basic formulae

Here are the two basic formulae for calculating both SI and CI. These are the ‘first-to-know’ basics to be aware about before moving ahead to complex, in-depth calculations pertaining to your investments.

For,

P = Principal Amount

Rate = Rate of Interest

T = Time Period

A simple example

Let’s consider a principal investment amount of INR 5 Lakh. At a rate of 30% for a period of 30 years, what is the money you would possess at the end of 30 years? With a basic SI calculation using the formula mentioned above, you will possess 45 Lakh rupees + principal amount = INR 50 Lakhs in total.

On the other hand, if CI is added to your investment, the numbers achieved are mind blowing. For the same figures and the problem statement mentioned above, you can achieve an approximate revenue of INR 130 Cr on the same principal amount of INR 5 Lakhs.

The compelling power of compounding

The reason why compound interest is so significant for an investor is because it’s a scenario where ‘interest earns interest’. Thus, your earnings grow and multiply at a constant yet faster rate. Here are some factors that demonstrate the compelling power of compounding:

Depending on the compounding frequency, your investment returns consequently improve.
Your interest earns higher interest through the year.
By staying invested, your returns significantly become higher and higher in the long term.

The 8th Wonder and the Rule of 72

Albert Einstein referred to CI as the ‘8th Wonder of the World’ for all the right reasons. Compounding is best suited for long-term investing. To understand this, let’s explore the ‘Rule of 72’:

The Rule of 72 is a concept that indicates how your money doubles in compounding. For your investment, calculate the number of years it would take for your money to double using the Rule of 72.

Here’s the simple formula for calculation:

Number of years for your money to double = 72/ROI.

Let’s say your rate of return = 10%

Therefore, Number of years for your money to double = 72/10 = 7.2 years.

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Albert Einstein referred to Compound Interest as the ‘8th Wonder of the World’ for all the right reasons.

Enter the world of investment

Now that we have a fair idea about interest and how it can make an impact on your principal investments, you can explore the technicalities of interest accumulation and wealth creation. With a step-by-step understanding, you can build your knowledge which will come in handy when you begin to explore the stock market.

The post Everything You Need To Know About Simple and Compound Interest appeared first on Dutch Uncles.

Here’s Why You Should Start Investing With Your First Rupee

Aakash Sharma — Wed, 01 Sep 2021 03:35:09 +0000

Last year, the world experienced the crisis of the century, which, not unlike a war, is still affecting the lives of people around the world. From this experience, among other things, arose the need for security, be it health, social safety, politics, or finance. In today’s economic climate, making regular money is not enough for financial security. Making money by working for yourself or others is the key to building a secure source of income. But to make a lot of money from these salaries over time, you need to start “investing” your money so that it grows in value over time.

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Income provides the natural starting point for investment planning because you cannot invest what you do not possess.

Inflation – what is it and how your investments can help overcome it?

Inflation is a periodic hike in the prices of commodities due to different factors. Inflation occurs when the money supply increases in proportion to the level of production in an economy. Prices rise because more money is spent on acquiring fewer products.

As an investor, you should explore investment avenues with returns equal to or greater than inflation. For example, if stock returns are 4% and inflation is 5%, the actual return on investment will be less than 1%, and you should avoid investing in such places.

If the value of long-term assets such as stocks and bonds rises or earns interest, they are protected from inflation. One of the primary reasons most investors invest in bonds, stocks, and mutual funds is to preserve their savings from inflation.

Therefore, you can protect your long-term investment returns by investing in various inflation-protected securities like the Inflation-Indexed Bonds by the Reserve Bank of India. These are financial instruments that develop with inflation and are therefore unaffected by inflation risks.

Why should you invest?

A person’s investment goals depend on their income, age, and risk tolerance. The following can be the chief reasons for you to invest your money:

Building wealth and legacy

You need to invest with the view to build your wealth. This means you have to save from your earnings vigilantly and invest those savings over time. Whether it comes from dividends or interest earned, the investment income can be used further to build wealth from the same financial instruments or other avenues.

To achieve your goals

You might have set some specific goals for your life. Well, to realise them, investing is a faster and safer way to go forward with. For example, if you dream of buying a home, the plan you create will motivate you to invest.

The crucial thing is to distinctly state your goals and how much money you will need to achieve them. Your goals can be short-term, medium-term, or long-term. By investing your money according to your plan, you can increase your wealth and achieve your goals faster without working extra years and even retire early.

Financial security

People need financial security, and it comes with more money. If you have enough money that you made from, say, your investments, it can help you avert many challenges of life with financial backing. An example of this can be a costly life incident, like a major health crisis or the destruction of your house by a disaster. Investments and monetary returns will provide you with financial security to deal with unforeseen situations.

Many people confuse savings and investments with being the same concepts, but they are not. Your savings correspond to the income you have for future expenses. However, investing means the investment of your savings in financial instruments or products such as stocks, bonds, real estate, etc., with the hopes of capital gains and financial returns.

In conclusion, it is never too late to begin investing. You may earn dividends if you invest in shares, rent from a property you lease out, or interest from bonds. Remember, regardless of age or income, all investments start with the first rupee.

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