May 31, 2009

What is a Virtual Credit Card?

YOUR online shopping just got easier and safer with the virtual credit card. But, what's a virtual card? A virtual card is just like your credit/debit card; only it isn't tangible. It was introduced to check the rising instance of fraudulent transactions over the internet.

How does it work?
Many banks offer this facility but the process works differently with different banks. However, here’s a general outline:

Let's assume you have a bank account with ABC Bank. Now, follow these steps to get your very own card.
Step 1: Log on to your online account
Step 2: Register for the use of this virtual card
Step 3: Fill in the amount you will need for shopping
Step 4: The bank will generate an exclusive 16 digit number, a CVV2 number and expiry date for this virtual card

There you go, you are ready for shopping online. However, the card will be valid only for a particular period of time; usually, it’s valid for 24 hours. So, you need to use it within that time frame. It can be used at any merchant website, which accepts the service provider (VISA, Master card) mentioned in the card.

Also Read: How to get over the fear of Investing?

Features of a virtual card
1. It is a safe and risk-free option
2. It has temporary PIN numbers, which assures safety
3. It is time bound; one needs to use it within the time limit specified before the virtual card expires
4. You need to set a limit to your spending and will be eligible to avail the amount specified on the card, which is dependent on the credit limit of your credit card or cash reserves on your debit card.
5. You can use both your credit card and debit card to generate your virtual card!
6. The balance amount, if any, will be credited back to the main account.

There are a few disadvantages:
There could be delay in shipping merchandise, as the merchants might wait to receive the money before dispatch of goods.

Also, you need to complete a transaction within 24 hours. So, forget about paying at your leisure. Once a transaction has been completed successfully, the card cannot be used a second time. There is also a spending limit of Rs 50,000 with most banks that you need to keep in mind.

Most banks provide the use of a virtual card for free. You only need to be registered with online banking, and you can generate several virtual cards in a day.

Read: How Rs 1 lakh grows to Rs 50 lakh in 25 years


May 30, 2009

Importance of dividends

Dividends matter more than some investors think. Growth-focused investors sometimes treat dividends as the icing on the cake, but they are more important than this. Here are six reasons why investors should care about dividends:

1. Re-investing dividends has a significant impact on the total returns from stock market investments. Thanks to the magical power of compound interest, dividends can make all the difference to even lack-lustre capital returns. Barclays Capital's 2009 Equity Gilt study showed that $100 invested in the US market in 1925 would have grown to $6,443 by the end of 2008 without re-investing dividends but to $193,687 if dividend income was re-invested throughout the period.

2. At a time of historically low interest rates, high-yield shares can make up for the poor returns on deposit accounts. A year or so ago it was easy to match the 5% yield offered by the MSCI Europe index in a risk-free savings account. Now the income from dividends looks comparatively attractive and the risk to capital of the equity investment is a more acceptable price to pay for the higher yield.

3. Focusing on high-yield stocks can improve your capital returns as well. At the market's lowest point in March 2003, the average share in the MSCI UK index yielded 4.8% while the 10 highest-yielding shares averaged 11.9%. As the market recovered from its lows, investors benefited not just from the higher initial income but also from the fact that the high-yielders gained 91% over the next year compared to the 49% achieved by the average share. Buying high-yielding shares can offer a "double whammy" - high income and a high capital gain as well.

4. In bull market in which the value of a share is rising at 15 or 20% a year, the addition of 2 or 3% in dividend income is nice to have but no more than a welcome addition to an investor's return. In a bear market, however, a high dividend yield can offset capital losses and act as a support to shares because the prospect of high and reliable income will bring in marginal buyers. As share prices fall, yields rise, making shares with a decent payout seem attractive compared to other income investments such as bonds.

5. Companies are generally unwilling to cut their dividend unless they really have to, although recent cuts have shown that there is less stigma attached to passing the payout than used to be the case. It reflects badly on a company's management and cuts tend to be punished in the market. For this reason dividends have tended to be less volatile than both earnings per share and share prices. Dividends smooth some of the ups and downs of investing in the stock market.

6. Steadily-growing dividends are an indication of the health of a company so it is not too surprising that companies that can boast a rising dividend payout have also tended to outperform the rest of the market. Rising dividends are a sign of strong cash-flow, which is the lifeblood of any company. Because of this dividends are not just for income investors.

Read - Earnings per share (EPS) ratio & what it means!


May 29, 2009

How Rs 1 lakh grows to Rs 50 lakh in 25 years

Stock Markets viz. Sensex and Nifty are on the Surge again after watching the downside taking down to the October Lows. You could be wondering if you should still invest in equities and go through the uncertainty from time-to-time. Tell you what, YES, you need to invest in equities. Long-term equity investing as an asset class continues to beat all other investment avenues like real estate, gold,bonds or fixed deposits etc.

That is, equities in India have grown by an average of 17 per cent per year since the last 25 years. And in the last two months only, have rosen from the March low of 7800 to the today's 14625 which is near to double.

There have been ups and downs in these 25 years but the market always discounts the bad news, re-adjusts, consolidates and, eventually, moves up. The average return from all other asset classes (bonds, real estate, gold etc.) remains between 6 and 10 per cent range for the same time period.

Read: How to get Over the Fear of Investing

Returns of 6 to 10 per cent - Big deal?
Oh yeah, it is a big deal because of the magic of long-term compounding.

If you had invested Rs 100,000 (1 lakh) in equities 25 years ago and left it untouched, the value of this investment, today, will be Rs 50,65,782 (over Rs 50 lakh).

On the other hand, Rs 100,000 compounded at 10 per cent (the next best asset class) the value of the same would be Rs 10,83,470 (over Rs 10 lakh).

The difference = Rs 39,82,312 (over Rs 39 lakh).

This difference emphasises that equity should form a part of your asset allocation. 'How much' is still a matter of debate but you could use this rule.

While there is no one-size-fits-all allocation for equity, a reasonable thumbrule can be 100 less your age. The result is the percentage of your savings you should allocate towards equity. As you grow, you should revisit and adjust this asset allocation.

To conclude..
All bad things must come to an end. So, here's a mantra for you:

In a newspaper article written by Aditya Puri, Managing Director of HDFC Bank, he says, "Stay focused on the fundamentals (of your stock holdings). Every financial crisis is different but they all end. As this phase of extreme pessimism abates a bit, global investors are likely to reward India for the robustness of our systems."

Read: 4 Golden Rules of Equity Investing


May 22, 2009

4 Golden Rules of Equity Investing

IF you want to invest in equities, there are only four things you need to remember.

1. Choose the right company
Look for superior and profitable growth. The company should earn at least 20% return on its shareholders’ capital.

Ideally a long-term investment perspective (more than five years) allows you to participate in the company’s growth. At the short end (3-6 months), share performance is driven more by market sentiment and less by company fundamentals. In the long run, the relevance of the right price diminishes.

Must read:
How to get over the fear of Investing?
3 important things to know as a new investor!!!

2. Be disciplined
Stock investing is a long, learning experience. You will make mistakes, but also learn from them. Here is what you can do to ensure a smooth ride.

--> Diversify your investments. Do not put more than 10 per cent of your corpus in one stock, even if it’s a gem. On the other hand, don’t have too many – they become difficult to monitor. For a passive long long-term investor, 15-20 is a healthy number. Use this asset allocation tool to find out if you need to invest beyond equities.
--> Research and analyse your company's performance through quarterly results, annual reports and news articles.
--> Get a good broker and understand settlement systems
--> Ignore hot tips. If hot tips really worked, we'd all be millionaires.
--> Resist the temptation to buy more. Each purchase is a new investment decision. Buy only as many shares of one company, as fits your overall allocation plan.

3. Monitor and review
Regularly monitor and review your investments. Keep in touch with quarterly results announcements and update the prices on your portfolio worksheet at least once a week. This is more important during volatile times when there can be great opportunities for value picking!

Also, review the reasons you earlier identified for buying a stock and check whether they are still valid or there have been significant changes in your earlier assumptions and expectations. And use an annual review process to review your exposure to equity shares within your overall asset allocation and rebalance, if necessary.

Ideally, revisit the Risk Analyser at every such review because your risk capacity and risk profile could have undergone a change over a 12-month period.

Also read: Strategies For Successful Investing

4. Learn from your mistakes
When reviewing, do identify and learn from your mistakes. Nothing beats first-hand experience. Let these experiences register as `pearls of wisdom' and help you emerge a smarter equity investor.

Also read: How to make money in the stock market?


May 18, 2009

Tips for Small investors: Don't buy; don't sell!

TODAY'S Stock Market rally has probably caught the small investor by surprise. Having burnt his fingers in a bad bear phase recently, the small investor had exited the stock markets and was only too scared to re-enter. So today's turn of events, the opening followed by circuit breakers, has only made him wonder if he has missed the bus.

Must Read: How to get over the fear of Investing?

If you are among the scores of such small investors, then the good news is, you haven't missed the bus. According to EquiTipz following are some of the questions answered that are popping up in the investors mind as to what the small investor should be doing now.

Question 1: Should you buy?
Answer: No

“Don’t go overboard and buy anything right now; you might fall off the cliff again.”
In the last two months, the Sensex has increased by 50 per cent. However, the companies haven’t made that kind of profits yet. So, there is no basis for you to buy in this rally. A market correction of 20 per cent is expected very soon.

Some Financial Planners mirror this. This is what they have to say. "This rally has been very good. Stability of the government is a good thing, and it has had a positive effect on market sentiment. However, the crucial factors that you need to look at while investing in stocks are how the economy and global markets are faring, and also the performance of companies. Markets will be volatile, so you need to be cautious about buying."

There may be a correction within the next 3 to 6 months and in the range of 15 to 25 per cent. So if you want to buy, go ahead. But do it with a long term horizon. It is also adviced that you space out your investments and not invest in lump sum.

Question 2: Should you sell?
Answer: No

“Retail investors shouldn’t be selling on a day like this. If you don’t need the money right now, there’s no need to sell.”
Just remember the age-old principle of equity investing: You shouldn’t sell unless you have a specific purpose. Why take out money when there could be an opportunity for you to make more profit on a later date. After all, equity is for the long term.

Read: 3 important things to know as a new investor!!!

"If you must sell, then do so if you have made a profit of about 15-18 per cent." Sell only if you must.

Time tested rules of equity investing
Events like these are a good time to revisit time tested principles. So let us re-look at the rules of equity investing:

1. Invest in equities only if you have a long term perspective, that is, you won't have to withdraw for at least 5 to 7 years. If you are clear about this, it does not matter if you start investing in a bull market or a bear market.
2. Withdraw your money only if you need it. For instance, if you have invested in equities to build a corpus for your retirement which is 10 years away, there is no reason to withdraw because of a single day's events.
3. Never invest all your money in one go. Invest in parts. Do a Systematic Investment Planning (SIP). It is a disciplined way of investing irrespective of the state of the market.
4. Diversify your investments.
5. Don’t use the market to make a quick buck. The market is erratic and unpredictable. Nobody has ever timed it perfectly.

Must read: Stock Picking - Which stocks to buy?

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