5 things to know before getting an insurance

March is considered as fiscal year end and there will be salary hikes for most of the employees. They will be considering Life Insurance as an option for investment as it provides you tax benefits. But there are lot more to consider before getting a Life Insurance Policy. These 5 basic points might help you to look at how to evaluate how much and what type of life insurance is needed. 

1. Does buying life insurance make sense for everyone? If you have no dependents and enough assets to cover your debts and the cost of dying, then insurance is unnecessary cost for you. If you have dependents and enough assets to provide for them, then also you do not need of any life insurance.
2. If you have dependents (especially if you are the primary provider) or significant debts that outweigh your assets, then you likely will need insurance to ensure that your dependents are looked after if something happens to you.
3. "As you grow old, it will be harder to qualify to get an insurance. So better you get an insurance when you are young." This is how insurance agents pursue you. In brief, Insurance company makes money by betting on how long you live. If you have taken an insurance policy and you die young, you will be a bad bet for them. The simple fact is that insurance companies want higher premiums to cover the odds on older people, but they won't refuse to give an insurance at any age. That said, get insurance if you need it and when you need it. Do not get insurance because you are scared of not qualifying later in life.
4. Choosing the face value (the amount your policy pays when you die) depends on how much debts you have. You should buy an insurance with face value which pays off all your debts. If you are the only provider for your dependents, then you need a policy payout that is large enough to replace your income plus a little extra to guard against inflation for a set period of time so that any of your dependent may take responsibility of other dependents in that period of time.
5. Obviously there are other people in your life who are important to you and you may wonder if you should insure them. As a rule, you should only insure people whose death would mean a financial loss to you.  

These are basic 5 points you should consider while getting an insurance policy for yourself. If you need life insurance, it is important to know how much and what kind you need. Although generally renewable term insurance is sufficient for most people, but you have to look at your own situation.

Money is a drug

I am not so experienced about money and any of financial matters. So, I am interested to know more about how money works. And if it really works, how can we make it work for us. This makes me read some cool stuff about money which I like sharing it with everyone. This is also another excerpt from a book in which money is visualized as DRUG. And I found it so true. 

"Money is a drug. If you become addicted to drug, it is hard to break that addiction." 

Money is a drug because people are happy when they have money and upset and moody when they didn't. Just as heroin addicts get high when they inject the drug, they also get moody and violent when they don't have it. 

Once you get used to receiving it, that addiction keeps you attached to the way you got it. Put another way, if you receive money as an employee, then you get accustomed to that way of acquiring. If you get used to generating money by being self-employed, it is often difficult to break the attachment to earning money in that way. And if you get used to government handouts, that, too, is a hard pattern to break. 

This sentence sounded interesting of the lot. "It is more than breaking a habit. It is breaking an addiction." It needs lot of will power to break an addiction. If you are changing paths of money earning, then you should have the will power to quit the addiction and audacity to pursue new path of money making. 

  

Derivatives: A boon or bane?

Many people don't know that there exist a financial instrument called "DERIVATIVES". And moreover most of them think that if market crashes, everyone who are into stock market lose their money. JESSE LIVERMORE, the greatest speculator of all times, did most of his money when market crashed in 1929. Most of the people ask these questions and I was also one among them.

How can anyone make money when market crashed?

What is shorting? 

How can anyone sell anything before buying?

The brief understanding of derivatives might answer some of these questions.

A derivative is a financial instrument whose value depends on the value of an underlying asset. If a stock price of company ABC is Rs.500, then the ABC stock derivatives will be dependent on the value of the stock ie Rs.500. These instruments doesn't have their independent values. The value of these derivatives increase or decrease when the value of underlying asset appreciates or depreciates respectively. For example, if stock price of company ABC increases to Rs. 600, then you can see the reflection of appreciation in ABC stock derivatives as well.

As you have understood what a derivative instrument is, you might be eager to know what are those underlying assets. The underlying assets might be equities, commodity (ex.gold, silver, crude oil, copper), currency(ex.Re and dollar), interest rates etc... The list of derivatives changes from country to country. In brief, Derivatives are Risk Management tools. How does derivatives act as risk management tool might be the next question.

For understanding purpose, let us consider a derivative instrument called futures contract. A futures contract is an agreement between 2 parties to buy or sell an underlying asset at certain time in the future at a certain price. In market terms, Buying is also mentioned as "going long" and selling is mentioned as "shorting". So if a speculator is bullish on underlying asset, then  he goes long in futures and if he is bearish, then he short the futures.

This sounds like buying equities and selling equities in stock market. What makes it different from equities then?

2 things makes derivatives a risk management tool. In simple words, these 2 things decide whether its a boon or bane for the trader.

• You can short in derivative market and hold it for more than one day.
• LEVERAGE EFFECT.

Let me explain shorting and going long with an example. A tomato sauce producing company wants tomatoes for production of sauce. But they want the tomatoes in near future, say after 6 months. A farmer who is growing tomatoes needs a buyer after 6 months as well. Farmer will be producing 5 quintal of tomatoes and company also wants 5 quintal of tomatoes. The current price of tomatoes is Rs.2000 per quintal. The company fears that tomato price might increase in future. A farmer on other side fears that price might decrease. Now the company and farmer come to an agreement. The company agrees to pay Rs.2500 for 1 quintal of tomatoes and farmer also agrees for the price, though the real trading of tomatoes hasn't occurred yet. 

Now, company has gone long on tomatoes and farmer has shorted on tomatoes. After 6 months, if price of tomatoes increases above Rs.2500, then company will be profitable because he is tied up with the farmer for Rs.2500 per quintal and farmer will be the loser. So, in this case buyer is profitable and seller is on the losing side. If tomato prices decreases, then buyer will be the loser and seller will be the gainer. Now you can understand how Jesse Livermore made millions by shorting market.

LEVERAGE EFFECT:

This leverage effect of derivatives is what attracts traders the most. Consider NIFTY FUTURES CONTRACT. The unit of trading derivatives is called LOT. 

1 LOT of NIFTY FUTURES = 50 units of Nifty.

Consider present value of NIFTY is 5600. Then 1 unit = Rs.5600. So, 1 lot of NIFTY costs 5600*50 => Rs. 2,80,000. But we are not actually buying Nifty units. We are buying Nifty futures, where we have to pay only 10% of Rs.2,80,000 ie Rs.28,000 per lot. This 10% is called initial margin, according to financial terms.

If a speculator is bullish on NIFTY, he buys 5600 NIFTY FUTURES. For every buyer there should be a seller on other side. So another person would have shorted NIFTY at 5600. If NIFTY goes to 5700 ie 1.7% up move, then profit for bullish speculator will be 100*50 units = Rs.5000 and the bearish person would lose Rs.5000. By investing Rs. 28000, the bullish speculator made 17% returns on his investment and bearish speculator lost 17% capital. 

So, Leverage benefit => 100/(initial margin)

1% movement in NIFTY SPOT is leveraged to 10% movement in NIFTY FUTURES. The initial margins changes from asset to asset and thus changing leverage benefit too. In other words, leverage benefit depends on volatility of assets. More the volatility, lesser the leverage effect and vice-versa.

This is a high risk high reward game. Its on you to decide whether its a boon or bane. 

McD's Secret behind Success

     Does McDonald's sells the best Hamburgers of the world? Most of them won't agree to this. Then why McDonald's is such a successful business all over the world. Read the below excerpt which is taken from a resourceful book.

     Ray Croc, the founder of McDonald's, was asked to speak to the MBA class. After a powerful and inspiring speech, the class adjourned and the students asked Ray Kroc if he would join them at their favorite hangout to have few beers. Ray Graciously accepted.

     "What business am I in?" Ray asked, once the group all had their beers in hand. Everyone laughed and most of the students thought that Ray was just fooling around. No one answered, so Ray asked the question again. "What business do you think I am in?"

     The students laughed again, and finally one brave soul yelled out, "Ray, who in the word does not know that you are in the hamburger business." Ray chuckled. "That is what I thought you would say."He paused and then quickly said, "Ladies and gentlemen, I am not in the hamburger business. My business is real estate."

     McDonald's does not give you the best hamburgers of the world. But they are the best sellers of Hamburgers of the world. In their business plan, Ray knew that the primary business focus was to sell hamburger franchises, but what he never lost sight of was the location of each franchise. He knew that the real estate and its location was the most significant factor in the success of each franchise. Basically, the person that bought the franchise was also paying for buying the land under the franchise for Ray Kroc's organization.

    McDonald's today is the largest single owner of real estate in the world. McDonald's owns some of the most valuable intersections and street corners all over the world. 
         
      Success of the McDonald's is because they are the BEST SELLERS of hamburgers and not the best bakers of hamburgers. All respect to the largest single owner of real estate in the world, RAY KROC.

Risk Management

Risk management is a process of identification, analysis and either acceptance of uncertainty in investment decision making. This is a typical explanation of risk management according to text books. But how to apply this risk management into trading stocks is unknown to many people.

You cannot control the markets but you can control your money and your risk on each and every trade that you make. William O'neill has said that, "The whole secret to winning in the stock market is to lose least amount possible when you are not right".

When you decide to trade a stock, initially you should ask yourself these 2 questions:

1. How much money should I risk on this trade?

2. How many shares should I buy? 

The 2% rule is the one what many traders follow in their money management strategy. Most of the traders agree that you should not risk more than 2% of your trading capital on a single trade.As stock movement is very random and though the charts tell you that stock will move in a desired direction, it might move against the desired direction and you will be on a losing side. 

The 2% Rule:

• At the start of your month, if the trading capital is about Rs 1,00,000, then you can take risk of losing 2% of 1,00,000 ie Rs. 2000.This answers the first question "How Much money Should I risk on a trade?". Next is "how much shares should I buy?".
• If you are buying a share of price Rs. 250. And your stop loss is 240. Then do this simple calculation to know how much shares to buy.

=> (2% of trading capital)/(Entry Price - Stop Loss)

For Above example,

=> 2000/(250 -240) 

=> 200 shares.

• Now You have the number of shares to be bought and capital involved in one trade (200 * 250 = Rs. 50000).
• Most important saying in trading or investment "Cut the loses, run the profits." Saying looks very simple. But people do exactly opposite of this. They run the loses and cut the profits soon. So, do trade with stop losses without miss.

Today's call:

BHARTI AIRTEL: SELL CALL

Scrip name : BHARTIARTL

ENTRY PRICE: 318-316.

Stop Loss: 322.

Target: 308-300

Time frame: 2 to 5 days

Return/Risk: 16/6

Important: If stock opens below 314, then you can see some bearish move in the stock. Then you can follow above entry price and stock price.

*Note: This is just personal opinion. I am not responsible for your losses or profits.