Inflation & how it eats your money silently & affects your investments! Investors beware of: Brokerage and taxation!

Inflation, is an economic concept. What the cause of inflation is, is not important to us from the point of view of this article. What is important to us is the effect of inflation! The effect of inflation is the prices of everything going up over the years.

A movie ticket was for a few paise in my dad’s time. Now it is worth Rs.50. My dads first salary for the month was Rs.400 and over he years it has now become Rs.75,000. This is what inflation is, the price of everything goes up. Because the price goes up, the salaries go up.

If you really thing about it, inflation makes the worth of money reduce. What you could buy in my dad’s time for Rs.10, now a days you will not be able to buy for Rs.400 also. The worth of money has reduced! If this is still not clear consider this, when my father was a kid, he used to get 50paise pocket money. He used to use this money to go and watch a movie (At that time you could watch a movie for 50paise!)

Now, just for the sake of understanding assume that my dad decided in his childhood to save 5 rupee thinking, that one day when he becomes big, he will go for a movie. Many years pass. The year now is 2008. My dad goes to the theater and asks for a ticket. He offers the ticket-booth-guy at the theater 5 rupees and asks for a ticket. The ticket booth guy says, “I am sorry sir, the ticket is worth Rs.50. You will not be able to even buy a “paan” with the 5 rupees!!”

The moral of the story is that, the worth of the 50paise reduced dramatically. 50paise could buy a whole lot when my dad was a kid. Now, 50paise can buy nothing. This is inflation. This tells us two important things.

Firstly: Do not keep your money stagnant. If you just save money by putting it your safe it will loose value over time. If you have Rs.1000 in your safe today and you keep it there for 10years or so, it will be worth a lot less after 10 years. If you can buy something for Rs.1000 today, you will probably require Rs.1500 to buy it 10 years from now. So do not keep money locked up in your safe.

Always invest money.

If you can’t think where to invest your money, then put it in a bank. Let it grow by gaining interest. But whatever you do, do not just lock your money up in your safe and keep it stagnant. If you do this, you will be loosing money without even knowing it. The more money you keep stagnant the more money you will be loosing.

Secondly: When investing, you have to make sure that the rate of return on your investment is higher than the rate of inflation.

What is the rate of inflation?

As we said earlier, the prices of everything goes up over time and this phenomenon is called inflation. The question is: By how much do the prices go up? At what rate do the prices do up?

The rate at which the prices of everything go up is called the “rate of inflation”. For example, if the price of something is Rs.100 this year and next year the price becomes approximately Rs.104 then the rate of inflation is 4%. If the price of something is Rs.80 then after a year with a rate of inflation of 4% the price go up to (80 x 1.04) = 83.2

So, when you make an investment, make sure that your rate of return on the investment is higher than the rate of inflation in your country. In our county India, for the year 2005-2006 the rate of inflation was 4% (Which is really low and amazing!).  This rate keeps changing every year. The finance minister generally gives the official statement on the inflation rate of the country for a particular year.

What is the rate of return?

The rate of return is how much you make on an investment. Suppose you invest Rs.100 in the market and over a year, you make Rs.120, then you rate of return is 20%.

If you invest Rs.100 in the market today and you make money at a 3% “rate of return” in one year you will have Rs.103. But now, since the rate of inflation is at 4%, an item costing Rs.100 today will cost Rs.104 a year from now. So what you can buy with today’s Rs.100, you will only be able to buy with Rs.104 a year from now.

But the Rs.100 that you invested has grown only at a 3% rate of return and so it is worth Rs.103. In effect, you are loosing money!

So in conclusion, the rate of return on your investments, have to be higher than the rate of inflation.

From the above paragraphs you can note how silently, inflation eats into your money. You would not even know about it an your money would sit loosing value for no fault of yours. But inflation is not the only thing you should be considering, there are other things too that eat into you money. The first thing is “brokerage” and the second thing is “taxation”.

 

Investors beware of: Brokerage and taxation!

You probably know the concept that all your transactions in the stock market are done though a “stockbroker”. A stockbroker earns a commission on whatever transaction you make. Suppose you make a transaction of Rs.2000, and the stockbroker charges you a 3% commission, then you have to pay the stockbroker Rs.60 (3% of Rs.2000) for the transaction. So your total investment in the transaction in “not Rs.2000”. The total investment in the transaction is Rs.2060/-

So after sometime, if the price of the stocks you invested in goes up to Rs.2060 then you have not made any money because the total amount you invested was Rs.2060/-

What is more, even when you sell the stocks, you have to pay the broker brokerage of 3%. This means that, when you sell the stocks for Rs.2060, you have to pay the broker Rs.61.6 so the profit of Rs.60 you made on the transaction is gone, in fact you actually make a loss of Rs.1.6!!

So in effect even though you made a profit of Rs.60 because your stock price went up, you have actually made a loss.

If combine this with the fact that inflation reduces the value of money over time, you are just loosing money if you do not invest wisely without understanding brokerage and inflation.

Important note about brokerage: Brokers make money on whatever transaction you make. Whether you buy or sell, brokers will make money. Because brokers basically make money on transactions. Because of this, brokers tend to encourage you to trade. They don’t really care about whether you make a profit or loss. They just care about whether you are trading. The more money you are using for trading, the more they will make. Because of this, it would be wise to not blindly follow your brokers advise. The broker will give you “hot tips” etc. not because they are looking out for you and your profit, but because they are thinking about their own personal profit!

There is even one more factor that eats into your money. Tax!!!

Please note: We are not in any way encouraging you to not pay tax! We are just educating you about it.

There is a “short term capital gain tax” in our country. For a short term (less than one year) you have to pay tax on any capital gain you make though the stock market trading. How much % tax you have to pay, depends on which “tax bracket” you fall in.

Just to give you an idea. If I make Rs.100 though a transaction in the stock market, since I fall in the 33% tax bracket. It have to pay Rs.33 of that to the government!!

Please note: The government encourages you to be a long term-investor by having no long term capital gain tax. If you make a capital gain by investing for a period greater than one year, the you do not have to pay any tax on the money you make.

Now combine this short term capital gain tax with brokerage and inflation! Think about it for some time. You will almost make nothing on a small profit gains! If you want to make money out of the stock market, you must make large profit gains.

Conclusion: As a general rule, just for the sake of simplicity, your investments must grow at a minimum rate of 15% per year to stay ahead of inflation, tax and brokerage!! Remember this when making all your investments.

This concludes our basics of the stock market guide. There is lot more to learn! And the best way to do it is to start investing! (Don’t invest too much in the beginning but do start!) Once you have your money in the market, you will start to understand things a whole lot better!

Logos of 113 car Manufacturers

 

ABARTH

 

Abarth history:
Karl Abarth was born on November 15th, 1908 in Vienna, Austria. At the age of seventeen, he became an apprentice at Castagna, Italy, designing chassis for motorcycles and bicycles. In 1927, he returned to Austria to work at Motor Thun Motorcycle plant. This was also the beginning of a highly successful racing career. Carlo started racing motorcycles and he began winning. He was awarded the champion of Europe five times, among other racing accomplishments.

In 1934, Austria and Germany began to feel the pains of the great Depression and the onset of World War II. Karl decided to move to Italy and further pursue his motorcycle racing career. While in Italy, he became known as Carlo Abarth. During a race in Yugoslavia, Carlo crashed and required hospitalization for over a year. After Carlo recovered he decided to stay in Yugoslavia until the end of the war. He began working with an individual named Ignaz Vok, converting automobiles to run on kerosene.

After the war, Carlo moved back to Merano where he began working with an individual by the name of Rodolfo Hruska.

Ferdinand Porsche was the founder of the Porsche dynasty and his son, Ferry Porsche had followed in his fathers footsteps. A long time friend of the Abarth family, Ferry Porsche presented Carlo Abarth with a job opportunity to help with the organization of the Porsche motor company. Abarth and Hruska were able to establish relationships with some of Italy’s most important automobile manufactures due to this job opportunity. There was a problem, however. Ferdinand Porsche was in a French prison being held as a German war criminal. Ferry and Carlo found a solution to this problem in the form of a man named Piero Dusio. Dusio was a highly competitive person and was driven by the desire to win automobile races. He had formed the Cisitalia Corporation with the goal of producing race cars. Carlo and Ferry asked Dusio to post bond for Dr. Porsche in exchange for their services in building a race car.

Thus the partnership between Porsche and Cistialia began. Abarth began working for Cisitalia as the technical and racing director.Ferdinand Porsche designed a single-seater, mid-engined, Formula 1 car. It featured four-wheel drive, an innovative quality of its time.It was a short-lived relationship however. Piero Dusio encountered difficulties and in 1949 moved to Argentina. This ended the Cisitalia Corporation. It did, however, offer Abarth an entrance into the manufacturing business.

The company featured the zodiac sign of Carlo Abarth, a scorpion. A factory was established in Turn, Italy with 35 employees. Armando Scagliarini, a driver for the Cisitalia company and the father of Guido, provided assistance to Abarth on this new-formed business venture. They began building automobile accessories which provided the funding for their racing expeditions. Exhaust pipes, manifolds, valve springs, valves, and gearboxes were just a few of the items produced by the Abarth Company.

In the early to mid 1950s, the Abarth Company began modifying mass-produced cars, mainly Fiats. These low-priced cars coupled with performance modifications, became unbeatable forces, winning most races that they entered. So much so, that Fiat began paying Abarth for each first or second place finish the modified Fiat vehicles would achieve.

In 1955, Fiat introduced the 600. This low priced fashionable vehicle had potential that Abarth quickly exploited. The displacement was increased to 747cc, greatly improving the overal performance. Not only was the company able to increase the engine capacity and tap into greater raw horsepower, but they were able to improve the aerodynamics of the vehicles, and lighten the overall weight. This formula was the key to Abarths success in the automotive world. But it was not the only reason they were successful. Many people were not able to purchase higher-priced sporty vehicles such as Ferraris or Bugatti’s, so these Fiat/Abarth creations were excellent opportunities to buy a lower priced race car but still achieve similar results on the race track.

The 600 led to the 850. Fiat supplied Abarth with incomplete vehicles and it was left up to Abarth to fit the car with brakes, exhaust pipes, carburetors, and crankshafts. This saga continued with Fiats next model named the 1000, then the 595 and 695. These Fiat-Abarth vehicles accumulated many national and international victories, making it one of the most successful race-car-prepared ventures of all time.

Abarths next endeavor was to build a complete Abarth vehicle. They began by making formula and sports cars that ranged from 1000cc and 2000cc. This was another success for the Abarth Corporation, amounting numerous victories in a wide spectrum of racing.

In 1971, the Abarth Corporation was purchased by Fiat. The company and structure remained the same, with the only change being the sports-car prototype being abandoned. Many Fiats continued to be produced with the Abarth badge, usually signifiny a sports package or high performance version.

You can visit the following site where you can get the Car and Logo history of the car manufacturer.

 http://car-logos.50webs.com/bmc-car-logo.html