Only one persons parent ( out of nearly 100) invested in stocks. No surprises here I guess.
To introduce them to the idea of stocks and bonds, I used the following analogy.
Imagine a tea stall outside the hostel gate. You frequent it each day, you like the owner and you like the tea even more. One day he says he has to shut shop because he has huge debt.
You want to bail him out.
You have the following choices.
1) Lend him say 50K and ask for 8% interest each year for 1o years. This is called a bond. Since he is in your debt, this is called a debt instrument. If the person is trustworthy there is no credit risk involved.
Whether he gets a profit or not, he has to give you the 8% interest. So there is no ‘risk’ for your investment in the sense that payments will be regular.
You reinvest the payments in the same shop and get the same interest or say, put it in a bank FD
2) You give him 50K but tell him that you want a share of the profits. That is you own the company. This is called equity. If there is a loss, you get a loss. If there is a gain, you get a gain.
There maybe intermittent losses but over a long period of time, you expect the annual gains to outnumber the annual losses. You expect this because:
If I apply 30% tax to both equity and debt, the value will reduce.
Now I must take into account the effect of inflation.
I asked for the price of chai when they had it for the first time ever in their lives.
Rs. 1, Rs. 2.50 were some answers ( not all are from metros!)
This was 10 years ago.
Now the price is about Rs. 7
So this is about 11% inflation with the starting price as Rs. 2.50
So after having devalued the corpus due to tax, we must devalue it due to inflation.
Now who do you think got the better deal? The fellow who had the courage to stomach annual fluctuations or the fellow who wanted ‘steady’ growth with practically no volatility
To introduce them to the idea of stocks and bonds, I used the following analogy.
Imagine a tea stall outside the hostel gate. You frequent it each day, you like the owner and you like the tea even more. One day he says he has to shut shop because he has huge debt.
You want to bail him out.
You have the following choices.
1) Lend him say 50K and ask for 8% interest each year for 1o years. This is called a bond. Since he is in your debt, this is called a debt instrument. If the person is trustworthy there is no credit risk involved.
Whether he gets a profit or not, he has to give you the 8% interest. So there is no ‘risk’ for your investment in the sense that payments will be regular.
You reinvest the payments in the same shop and get the same interest or say, put it in a bank FD
2) You give him 50K but tell him that you want a share of the profits. That is you own the company. This is called equity. If there is a loss, you get a loss. If there is a gain, you get a gain.
There maybe intermittent losses but over a long period of time, you expect the annual gains to outnumber the annual losses. You expect this because:
- students need a place to hangout outside the campus. So they would frequent tea shops.
- If the tea is good (and it is in this case) then more students would come and more often.
- Thus, there is a chance for consistent profit.
If I apply 30% tax to both equity and debt, the value will reduce.
Now I must take into account the effect of inflation.
I asked for the price of chai when they had it for the first time ever in their lives.
Rs. 1, Rs. 2.50 were some answers ( not all are from metros!)
This was 10 years ago.
Now the price is about Rs. 7
So this is about 11% inflation with the starting price as Rs. 2.50
So after having devalued the corpus due to tax, we must devalue it due to inflation.
Now who do you think got the better deal? The fellow who had the courage to stomach annual fluctuations or the fellow who wanted ‘steady’ growth with practically no volatility
