HOW WILL ASSET MONETISATION HELP THE GOVERNMENT?

By Moksha Grover

Finance Minister Nirmala Sitharaman announced on Monday that the Indian Government intends to monetize ₹6 lakh crore worth of state-owned assets over the next four years under its asset monetization pipeline. The union government has said that they’ll allow the private sector to bid for operating the assets for 25 years, and with a lump sum payment upfront, but without giving away title to the underlying assets. The Centre aims to sell off gas pipelines, roads, railway assets, and warehousing facilities among a host of other assets with the help of the National Monetisation pipeline (NMP).  The private sector can operate these assets for 25 years but they have to calculate what they can earn from it in various ways, over the next 25 years; discount that cash flow to its ‘present value (PV), deduct from that their profit margin, and pay the balance amount as an upfront rental to the government[1].

Lets us assume the value of the said asset is Rs 100. And return to the asset in real terms is 4% per annum (net of inflation)[2]. The present value of the 4% earnings, discounted at the real rate of interest to such an operator, assuming it is 6%, (again real as opposed to nominal rate) would be Rs 51.3[3]. Let us round it off to 50. Rs 50 represents the PV of an annuity of Rs 4, over 25 years, discounted at 6% per annum[4]. In effect for every Rs 100 of assets monetized, the cash flow yield from the asset that the operator can expect is Rs 50[5]. From this, he must deduct the return that he expects from his investment, the risk premium attached to the earning, and the general uncertainty of dealing with a capricious government[6]. Assume the operator wants a minimum of 50% return on his equity[7]. He will then be willing to pay Rs 35 (rounding off the calculation) for the Rs 100 assets[8]. One doesn’t know if the Rs 6 trillion number is indeed the market value of the assets[9]. But assuming it is, then the total value of upfront rental it can expect from such monetization will be in the region of Rs 2.1 trillion or less[10]. In fact, given normal discounting rates of 50% in such cases (100% return on capital), the government should expect no more than Rs 1.5 trillion[11].

WHY IS THE GOVERNMENT DOING THIS?

The Indian government has been facing a silent budgetary crisis. This crisis resulted because of disasters like demonetization, tax cuts for corporates, and GST made by Modi. Because of these serial disasters, the GDP growth of the country has fallen drastically. As a result of GDP falling, Modi had to steeply hike the prices of inelastic commodities like petroleum products to pay for corporate tax cuts. The price hike and hike in direct taxes burden the lower and middle-class people, indirectly, and hence, they have to reduce their consumption. So their consumption falls dragging GDP growth down even further. As a result of all these events, the economy tanked by sinking GDP by 28% in one quarter[12]. The GDP for the full year fell by 7%, the highest of any major economy[13]. All the government revenues are left plummeting and deficits soaring, thus necessitating record borrowings to pay for government expenses. Presently, the government debt as a percentage of GDP now stands in the region of 90%[14]. Government tax and non-tax revenues are expected to be 22.7% of GDP, and the combined government deficit is projected at 6.3%[15]. So, the government was left with no choice introduced asset monetization to fill its coffers. As and when, asset monetization will take place it will add up to the non-tax revenues of the government. All this trickery comes in the backdrop of India’s worsening credit ratings, which are just about a notch above junk, with a negative outlook.

FEW POINTS TO KNOW ABOUT ASSET MONETISATION

  1. Asset monetization involves monetizing brownfield assets and does not include the selling of land.
  2. “Ownership of assets will remain with the government and there will be a mandatory hand-back,” as said by finance minister Nirmala Sitharaman[16].
  3. The infrastructure line ministries included the pipeline—Roads, Transport and Highways, Railways, Power, Pipeline and Natural Gas, Civil Aviation, Shipping Ports and Waterways, Telecommunications, Food, and Public Distribution, Mining, Coal and Housing, and Urban Affairs—along with Secretary (Department of Economic Affairs) and Secretary (Department of Investment and Public Asset Management)[17].
  4. The estimated value corresponds to 14 percent of the proposed outlay for the Centre under the National Infrastructure Pipeline ( ₹43 lakh crore)[18].
  5. Asset Monetisation aims at tapping private sector investment for new infrastructure creation.
  6. Asset Monetisation is important for employment opportunities and generation, which will further help in accelerating economic growth and public welfare of the country.
  7.  The top 5 sectors (by estimated value) capture ~83% of the aggregate pipeline value. These top 5 sectors include: Roads (27%) followed by Railways (25%), Power (15%), oil & gas pipelines (8%) and Telecom (6%)[19].
  8. In terms of annual phasing by value, 15% of assets with an indicative value of ₹0.88 lakh crore are envisaged to be rolled out in the current financial year (FY 2021-22)[20]. However, the aggregate, as well as year-on-year value under NMP, is only an indicative value with the actual realization for public assets depending on the timing, transaction structuring, investor interest, etc[21].
  9. A range of instruments is identified through which assets and transactions identified under the NMP are expected to be rolled out[22]. These include direct contractual instruments such as public-private partnership concessions and capital market instruments such as Infrastructure Investment Trusts (InvIT) among others[23].
  10. Union Budget 2021-22 had identified monetization of operating public infrastructure assets as a key means for sustainable infrastructure financing[24].

EFFECTS OF ASSET MONETISATION

Privatization of assets will lead to the following outcomes: –

  • Through the way of consumption or investment, privatization will lead to paring down of government instead of a further increase in government expenditure.
  • Efficacy of asset use is improved through lower real interest rates to spur private investment.
  • All the money that comes from asset monetization will go back to the government via a circuitous route.
  • Asset monetization will not result in any addition to the gross domestic in the economy, either by bringing in foreign savings or by attracting a significant synergy premium.
  • Asset monetization doesn’t add up to the share of resources available to the private sector and does not contribute to the growth of the private sector even by a penny.

In conclusion, the idea of selling existing government funds to create new ones is excellent. But in the current situation, there is no such thing, and speaking of the economy as a whole, there will be no other changes except transaction costs go up, and a severely limited government bandwidth is further stretched thin over needless paperwork.


[1] Sonali Ranade, ‘How Will Asset Monetisation Help the Government?’, The Wire (August 26,2021) < https://thewire.in/economy/how-will-asset-monetization-help-the-government> accessed 27th August 2021.

[2] Ibid.

[3] Ibid.

[4] Ibid.

[5] Ibid.

[6] Ibid.

[7] Ibid.

[8] Ibid.

[9] Ibid.

[10] Ibid.

[11] Ibid.

[12] there will be no other changes except e, th of the private secto even by a penny.  Ibid.

[13] Ibid.

[14] Ibid.

[15] Ibid.

[16] Ibid.

[17] Ibid.

[18] Ibid.

[19] Ibid.

[20] Ibid.

[21] Ibid.

[22] Ibid.

[23] Ibid.

[24] Ibid.

HOW DOES THE STOCK MARKET WORK?

By Moksha Grover

Are you scared of investing in the stock market too? Have you heard of people losing all their money by investing in the stock market? If it is so, then you are not alone. There are many individuals with limited experience who are scared to invest in stocks after hearing the horror stories of investors losing 50% of their portfolio value[1]. The reality is that investing in the stock market carries some amount of risk. But it is one of the best methods to increase one’s net worth if carried out in a disciplined manner. Today, most rich and affluent people have the majority of their wealth from investment in stocks.  

WHAT IS THE STOCK MARKET?

The stock market is where investors connect to buy and sell investments — most commonly, stocks, which are shares of ownership in a public company. ` When you purchase a public company’s stock you get entitled to the stock ownership of that particular company that is you become a shareholder. Stock ownership implies that the shareholder owns a slice of the company equal to the number of shares held as a proportion of the company’s total outstanding shares. For instance, an individual or entity that owns 100,000 shares of a company with one million outstanding shares would have a 10% ownership stake in it.[2] Most companies have outstanding shares that run into the millions or billions[3]. Anyone with a brokerage account can easily buy stocks online through the stock market. Most of the stock trades take place between investors. If we buy shares of a company, we are not buying these shares from the company itself. We are buying shares of another investor who has decided to sell his shares.

TYPES OF STOCKS

There are mainly two types of stocks that are common stocks and preferred stocks.

COMMON STOCKS

Common stock is a security that represents ownership in a corporation. Holders of the common stock vote on corporate policies and elect the board of directors. Common stock is further classified on the basis of voting rights. The basic proposition of common shares is that they should have equal rights –one vote per share system. But some companies have multiple classes of stocks, wherein each class of stock has different voting rights. In such a dual-class structure, Class A shares, for example, may have 10 votes per share, while the Class B “subordinate voting” shares may only have one vote per share. Dual- or multiple-class share structures are designed to enable the founders of a company to control its fortunes, strategic direction and ability to innovate[4].

PREFERRED STOCKS

Preferred stocks are a class of stocks that are granted rights different from common stocks. They usually have higher claims over dividends and asset distribution. Preferred stocks have limited or no voting rights in corporate governance. Preferred stocks have more priority to investors than common stocks as they possess characteristics of both bonds and common stocks.

HOW THE STOCK MARKET WORKS?

The stock market works in a very simple and easy way.  In a stock market, buyers and sellers negotiate the prices of stocks and make trades. This process is carried out with the help of a network of exchange. When companies list shares of their stock on an exchange then this process is called Initial Public Offering or IPO. Investors buy and sell stocks among themselves. The supply and demand of stocks are determined by exchange networks like the New York Stock Exchange or the Nasdaq. Supply-demand helps to determine the price of the security. Price is determined by the investors and traders willing to buy or sell. Bidding by the buyer for the highest amount is done. The amount that the buyer is willing to pay is often lower than the amount sellers ask for. The difference in the amounts is called the bid-ask spread. The bid-ask concept is not much of a concern for beginner and long-term investors as the amount differs by pennies.

The working of the stock market is a fascinating example of the law of supply and demand, in real-time. If there are more buyers than sellers, then the price of stocks trends up. If there are more sellers than buyers, then the price falls down. The stock market serves two very important purposes both for the companies and the investors. For the companies, the stock market helps to raise funds from the public and helps in their funding operations. It also helps in the development and growth of the company and further expands its projects and business. As the companies grow and expand their business, shares bought by investors become more valuable, thus helping them to gain more capital. In addition to this, investors also receive dividends from the company as their profits. Public companies selling their shares need to disclose all the material information required and also give a say in how their business works to the investors.

All these processes that help in the working of the stock market seem to be complicated, but in reality, these have become relatively easy with the help of computer algorithms that help in price-setting calculations. Bid, ask and bid-ask all are available on the broker’s website with the required information. Today, the stock market is considered to be one of the most reliable ways of making money.

WHAT IS THE STOCK MARKET DOING TODAY?

Anyone can look at the performance of the stock market with the help of market indexes like the S&P 500 or the DJIA. Previously, when the covid-19 cases in India were at a hike, the stock market fell drastically. But now, in the current scenario around 3.2 per cent of the 1,216 listed companies on the National Stock Exchange that have reported their June quarter earnings have managed to defy the odds by expanding their operating margins on a sequential basis for four consecutive quarters[5]. In India, currently, there are 40 stocks that are defying a widespread trend[6].

HOW TO INVEST IN THE STOCK MARKET?

  1. Decide the kind of account which you want to open: –

The first step to investing in the stock market is to decide the kind of account you want to open. Investment accounts can be opened for anything ranging from short-term goals to long, retirement savings to college savings etc.

  • Open a brokerage account: –

After deciding the kind of account you want to open, you have to open an account at a provider called a brokerage. When you choose a company, do look at their fees and available investment opportunities.

  • Depositing Money: –

To further continue with the investing process, you have to make an initial deposit. You can also set up recurring deposits to automate your investments going forward.

  • Choose your investments: –

Once you are done with the above-mentioned steps. You can buy and sell securities. You can take up mutual funds, exchange-traded funds (ETFs), individual stocks and bonds etc. These include hundreds of individual securities. It is recommended to have a diversified fund-based approach as it reduces the risk of losses and bad investments.

  • Purchasing chosen investments: –

After choosing what you want to buy simply enter the ticker symbol in the buy field and indicate how many shares you want to buy.

STOCK MARKET VS STOCK EXCHANGE

The stock market and stock exchange are two very different things but they are often interchanged with each other. The stock market is a wider term than the stock exchange. In fact, the stock exchange is a part of the stock market. The stock market includes many stock exchanges such as the Nasdaq or New York Stock Exchange (NYSE) in the U.S and NSE – National Stock Exchange in India.

We might have heard people talking about the performance of the stock market. When they talk about performance they mean thousands of public companies listed on multiple stock exchanges. In general, too stock market is a very broad term which comprises all the terms like mutual funds, ETFs, bonds and other securities beyond just stocks.


[1] Adam Hayes, ‘How Does the Stock Market Work?’, Investopedia (1st June 2021) < https://www.investopedia.com/articles/investing/082614/how-stock-market-works.asp&gt; accessed 1st September 2022

[2] Ibid.

[3] Ibid.

[4] Ibid.

[5] Chiranjivi Chakraborty, ’40 Stocks that  are Defying a Widespread Trend in India Inc right now, The Economic Times (1st September 2021) <https://economictimes.indiatimes.com/markets/stocks/news/40-stocks-that-are-defying-a-widespread-trend-in-india-inc-right-now/articleshow/85822852.cms > accessed 1st September 2021

[6] Ibid.

BITCOIN VS GOLD: WHAT IS THE FUTURE OF INVESTMENTS?

By Moksha Grover

Today, most people have shifted their focus toward investments for the purpose of strengthening their financial position. While there are many ways to strengthen one’s financial position, investment is considered to be the most apposite way. The covid pandemic has taught us a lot about different aspects of life. However, most importantly it has highlighted our way of savings and investments. During tough phases like lockdown, almost everyone suffered financially and was forced to make compromises within their lifestyle. Only those who made wise money decisions at the right time were left uncompromised.

During the pandemic, it was observed that more and more people started investing in safe-haven assets. The most popular safe-haven investment during the covid pandemic has been gold. Gold investments, as we all know, are said to give good returns most of the time. It is also viewed as one of the safest options for investments. However, nowadays, investment in gold is being challenged by cryptocurrencies. Cryptocurrencies are now being regarded as the new hot cake in the world of investments and are said to give even more returns than gold. The most trending and successful cryptocurrency is Bitcoin.

WHAT IS BITCOIN?

Bitcoin is termed a digital currency which is free of any central control or the oversight of banks or governments. Instead, it depends upon peer-to-peer software and cryptography. It is also known as digital gold because its properties are very similar to that of gold. Like gold, bitcoin too has a fixed supply and derives its value through its limited supply and growing consumer demand. Some of the pros and cons of this cryptocurrency are: –

PROS

  • Since bitcoin is entirely digital, it can be easily sold a transferred to another person’s account.
  • Bitcoin has the potential to give higher returns on investments because of its growing market.
  • Bitcoin can be used as a currency everywhere. It can be used for payments at any store that accepts bitcoin.
  • Investing in bitcoin now could lead to big payoffs down the road. Because bitcoin is an emerging investment and has the potential to increase in value.

CONS 

  • There is a greater degree of risk involved in bitcoin as it is extremely volatile and susceptible to large fluctuations.
  • Bitcoin is subjected to scams or stealing as it is completely digital and so web-based wallets have the possibility to be hacked.
  • Bitcoin’s value is totally dependent upon the phenomena of demand and supply. If the demand for other cryptocurrencies increases more than the demand for bitcoin, its value can decrease.

WHAT IS INVESTMENT IN GOLD?

Gold is a valuable yellow metal and is used for various consumer goods such as jewellery, and it is not in abundance. Gold is a must for all the special occasions in India ranging from weddings to other special functions. In fact, one of the largest markets for gold is found in India. Gold has a big significance in the country’s cultural value and is considered to be a store of value, a symbol of wealth and status and a fundamental part of many rituals. Investment in gold gives fruitful results most of the time. Some of the pros and cons of Gold investments are: –

PROS

  • Investment in gold is always a stable option as its value increases over time; even if the economy gets into recession, its value will not decrease.
  • If you have your gold stored in a precious metals IRA, it will be stored in a specific, safe vault that is overseen by a custodian who will manage your account. These accounts are often insured up to a certain amount, much like a traditional bank account, so you can rest easy knowing your investment is safe[1].
  • Gold is considered to be an ideal baseline for trading purposes and is being used up as long as civilizations have been around. So it is durable in nature.

CONS

  • Gold can be used as a currency only during an economic crisis. It cannot be used as a currency to buy something in normal times.
  • When you invest in gold you need to keep that physical item stored carefully and safely.

DIFFERENCE BETWEEN BITCOIN AND GOLD

CHARACTERISTICSBITCOINGOLD
Legality, Transparency and safetyBitcoin has safety issues and is not that transparent and legalGold ranks above bitcoin in safety, legality and transparency.
VolatilityBitcoin is extremely volatile. It is more susceptible to market whims and newsGold is a safer asset and is less volatile
Baseline ValueBitcoin has less baseline value as it is based on a full banking system and many people don’t have access to online banking services.As gold is used in a variety of ways, therefore, it has more baseline value than bitcoin.
RarityRareRare
LiquidityLiquidLiquid

WHICH TYPE OF INVESTMENT SHOULD BE CONSIDERED? GOLD OR BITCOIN

According to billionaire Ray Dalio, bitcoin is just a digital version of gold but he prefers physical gold over bitcoin. “If you put a gun to my head, and you said, ‘I can only have one,’” says Dalio. “I would choose gold.” Here’s why he prefers investment in gold over bitcoin[2].

  • Gold has thousands of years of historical record as a store value and doesn’t face the same competition risks as bitcoin has
  • Unlike bitcoin, gold is very less volatile. Its volatility is just one-fifth of the volatility of bitcoin.
  • Cryptocurrencies can never replace metals like gold and silver as they are being used for centuries in every corner of the world and have a very strong economic standing as compared to bitcoin. So Cryptocurrencies like bitcoin can only help increase the value of these metals but cannot replace them.
  • Gold has offered a very high degree of longevity but such degree of longevity offered by bitcoin is highly questionable.

FINAL VERDICT

Both bitcoin and gold have their own advantages and disadvantages. For now, it is very hard to predict whether an investment in gold will result in better returns or investment in bitcoin. Bitcoin, today is said to be giving more returns than gold. It is alleged that Bitcoin’s market cap will surpass gold’s market cap by 2030. However, nothing is for sure now. Many people prefer gold investments, at the same time many people have shifted towards investments in bitcoin. Bitcoin has a fantastic upside and limited downside, while gold has a more traditional risk-reward balance[3]. Bitcoin is good for short-term investments and getting high returns on it and gold is good for long-term investments and gives relatively lower returns than bitcoin. It is completely the choice of the investor regarding the kind of investment he/ she wants to take up. An investor can invest in bitcoin or gold or in both. It is completely the choice of the investor. But it is advisable to invest in both bitcoin as well as gold as it will help you diversify your investments and increase your chances of high returns.


[1] ‘BITCOIN VS GOLD: WHICH IS BETTER?’, NATIONWIDE COIN & BULLION RESERVE < https://nationwidecoins.com/bitcoin-vs-gold-which-is-the-better-investment/> accessed 11th September 2021

[2] Jade Scipioni, ‘Bitcoin vs. gold: Here’s what billionaire Ray Dalio thinks, make it (4th August 2021) < https://www.cnbc.com/2021/08/04/bitcoin-vs-gold-heres-what-billionaire-ray-dalio-thinks.html> accessed 11th September 2021

[3] Ravi Singhal, ‘Gold vs Bitcoin: Which one is a better option for investment?’, The Economic Times (8th August 2021) <https://economictimes.indiatimes.com/markets/cryptocurrency/gold-vs-bitcoin-which-one-is-a-better-option-for-investment/articleshow/85148997.cms?from=mdr accessed 11th September 2021

5 Simple Budgeting Methods to Help You Live Your Best Life

According to a 2020 survey by the National Foundation for Credit Counseling, only 47% of Americans use budgeting tools to keep track of their spending. A budget, on the other hand, as the most basic instrument in the financial planning process, might make it easier to meet your financial objectives.

Not only does a budget help you keep track of where your money is going, but it also gives you more control over that process. Without a clear plan for your cash flow, you could be spending against your own best interests without even knowing it.

How a proper Budget can power your Financial Independence?

Budgeting isn’t always enjoyable, but it’s one of the most crucial steps you can do to better your financial situation. Here are a few examples of how living on a budget might help.

– It aligns your spending with your goals: You may decide how you’ll spend your money each month depending on what’s most important to you by setting and sticking to a budget.

It can improve your debt repayment strategy: If you’re trying to pay off student loans, credit cards, or other types of debt, a budget might help you set aside more money so you can get out of debt.

It can help you achieve your savings goals: A budget can help you figure out how much you’re going to save toward your goal at the beginning of the month, whether you want to save more for retirement, develop your emergency fund, or put money down for your next vacation.

5 Budgeting Methods to Consider

1. Zero- Based Budget
A zero-based budgeting strategy is straightforward: income minus expenses equals zero.

This budgeting strategy is best for persons who have a fixed monthly income or can at least anticipate their monthly income. Add your monthly spending and savings to equal your monthly income after you’ve calculated your monthly income.

It’s critical to budget for all of your spending as precisely as possible. If you go over budget in one category, you’ll have to make up the difference by taking money from another. And forgetting about a significant expense can throw your budget off.

A zero-based budget may be a better alternative for someone who has been budgeting for some time because there is less space for error. Even so, keeping additional cash in your bank account as a buffer is a wise idea. Also, keep a modest emergency money on hand in case you face a major unexpected bill.

2. Pay-yourself-first budget
Another simple budgeting strategy that focuses on savings and debt reduction is the pay-yourself-first budget.

Simply put, every time you are paid, you set away a particular amount for savings and debt payments, then spend the remainder of your money as you see fit. This allows you to prioritise your savings and debt payback goals while making do with the leftovers.

For instance, you might prioritise paying off high-interest debt first while gradually creating an emergency fund. However, once you’ve paid off your high-interest debt, you may concentrate on other savings goals.

Of course, prioritizing your necessary expenses and obligations is critical. However, because you’ve already taken care of what’s most essential to you, you don’t need to be concerned about where you spend your discretionary spending.
This budget is ideal for someone who has trouble saving each month or doesn’t want to spend too much time planning out each spending.

3. Envelope System Budget
This way of budgeting is similar to the zero-based budget, but there is one major difference: everything is done in cash. An envelope budgeting strategy is planning out how you’ll spend your money each month and using an envelope for each category of spending. Then, according to your budget, you withdraw as much cash as you need to fill each envelope.

Take your grocery envelope with you when you go grocery shopping, for example, and pay for your purchases with cash. If you run out, unless you choose to withdraw cash from other envelopes, that’s all you can spend in that area for the month. However, don’t raid other envelopes too frequently, as this might lead to a snowball effect, and you could run out of money before the end of the month.

The envelope system is endorsed by financial expert Dave Ramsey, so it’s a good alternative for folks who share his money ideals, which emphasize paying down debt rapidly and utilizing cash rather than credit cards.

However, it’s not a smart budgeting approach for someone who doesn’t like having a lot of cash on hand or prefers to use credit or debit cards.

4. 50/30/20 Budget
The 50/30/20 budgeting method is simple and requires less effort than the envelope and zero-based budgeting methods. The goal is to categorize your spending into three groups

  • Necessary expenses (50%)
  • Discretionary expenses (30%)
  • Savings and Debt Payments (20%)

    This budgeting strategy is ideal for rookie budgeters because it does not necessitate detailed spending tracking. You can stick to this budget as long as you understand what constitutes a want vs a need and allocate adequate funds to savings and debt repayment.

The biggest disadvantage is that the 50/30/20 rule may be impossible for people who have a lot of debt or want to save a lot of money because 20% isn’t a lot of money.

However, the good news is that you may tailor it to your own requirements. For example, you might wish to consider raising savings and debt repayments while minimising discretionary and necessary expenses.

To put it another way, don’t get too fixated on the 50/30/20 ratio. Make the concept fit your requirements.


5. The ‘no’ budget
This unique budgeting strategy is totally based on not spending money that you don’t have, as the name implies. Rather than making a budget, you should:

Keep an eye on the balance of your bank account. To keep track of your spending, use a budgeting app or your bank’s online banking or mobile app.

Keep track of when your recurring expenses are due. Keeping a list in a spreadsheet, Microsoft Word document, or on a piece of paper is one way to do this.

Set money aside for savings and additional debt repayments. Increase your automatic monthly debt payments and use automatic transfers from checking to savings wherever possible.

Spend the remainder of your funds without being overdrawn on your account. You’ll be better equipped to determine how much money is remaining after key costs if you keep an eye on your account balance.

While the “no” budget sounds easier than the other techniques we’ve discussed, telling oneself “no” isn’t always easy. This budgeting strategy works best if you’ve shown spending restraint in the past and are confident in your ability to do so again.

Types of Debt

Understanding Debt

Loans, such as mortgages, vehicle loans, personal loans, and credit card debt, are the most common types of debt. The borrower is obligated to repay the loan balance by a particular date, usually several years in the future, according to the terms of the loan. The amount of interest that the borrower must pay annually, stated as a percentage of the loan amount, is also specified in the loan terms. Interest is used to reward the lender for taking on the risk of the loan, as well as to encourage the borrower to repay the loan fast in order to reduce their total interest expense.

Credit card debt works similarly to a loan, with the exception that the borrowed amount fluctuates over time based on the borrower’s needs—up to a predetermined limit—and has a rolling, or open-ended, repayment date. Consolidating loans, such as student loans and personal loans, is an option.

Types of Debt

1. Secured Debt
Putting yourself in the position of a lender might help you understand secured debt. When someone asks for a loan, the lender must examine whether the debt will be repaid. Creditors can limit their risk by using secured debt. Because secured debt is backed by an asset (also known as collateral), this is the case. To put it another way, the collateral acts as a “security” for the loan.

Cash or property can be used as collateral. It can also be taken if borrowers do not make timely payments. Failure to repay a secured debt might result in additional consequences. Missed payments, for example, could be reported to credit bureaus. In addition, an unpaid debt may be referred to collections.

For example, a secured credit card needs a cash deposit before it may be used to make transactions. Consider it similar to the security deposit you’d put down when renting an apartment. Secured debt includes mortgages and auto loans. With these, the collateral is usually the purchased property, such as a house or a car. However, there is a silver lining to collateral: For the borrower, a lower risk to the lender could mean more attractive lending conditions and rates. Furthermore, some lenders may be less stringent when it comes to credit score requirements.

2. Unsecured Debt
When a debt is unsecured, there is no need for collateral. Consider student debts, credit cards, and personal loans. If you don’t have any collateral, your credit will usually play a significant role in determining whether you qualify for unsecured debt—though there are some exceptions, such as school loans.

Credit reports are used by lenders to assess your credit. That is true for the majority of debts. However, loan criteria may vary. Creditors typically consider factors such as your payment history and outstanding debt. Credit scores—another instrument that lenders may employ—are calculated using similar principles.

In general, the higher your credit score, the more possibilities you have. A higher credit score, for example, could help you qualify for bigger credit limits or cheaper interest rates on an unsecured credit card. Some credit cards may provide benefits such as cash back, miles, or points. Remember that a higher credit score does not guarantee that you will be approved for unsecured credit cards or other loans. And just because a loan is “unsecured” doesn’t imply it’s okay to skip payments. If you go behind on your payments, it may harm your credit and lead to collections or a lawsuit.

3. Revolving Debt
You may already be familiar with revolving debt if you have a secured or unsecured credit card. A revolving credit account is open-ended, which means you can charge and pay off your debt as many times as you like as long as the account is in good standing. Revolving credit includes personal lines of credit and home equity lines of credit.

If you qualify for a revolving credit line, your lender will set a credit limit for you, which is the most you can charge on the account. The amount of credit you have available changes month to month based on how much you utilise it. The minimum payment amounts may also alter month to month. Any unpaid debt will be carried over to the following payment cycle, along with interest. What’s the greatest way to avoid paying interest? Each time you receive a bill, pay it in full.

4. Installment Debt
In some respects, instalment debt varies from revolving debt. This sort of loan is closed-ended, unlike revolving credit. That is, it is paid back over a set length of time. And, as the name implies, payments are usually made monthly in equal increments. Payments may be needed more regularly depending on the loan agreement.

Installment loans are available. Car loans and mortgages are examples of this. Unsecured instalment loans are also available. Student loans are an example of this. Another sort of instalment loan is a buy-now-pay-later loan, sometimes known as a BNPL.
When you pay off a loan in instalments, you’re repaying both the principal and the interest. As the debt is paid down, the amount of each payment that goes toward interest usually decreases. Amortization is the term for this procedure.




Understanding Financial Markets

What are Financial Markets?

Financial markets is a marketplace where buying and selling of securities like stocks, bonds, derivatives, commodities, currencies, etc. occur. These markets may include securities which are listed on an regulated exchanges or are traded Over-The-Counter(OTC). Financial markets basically provide a way for those who have excess money to invest and those who are in need to money to borrow.

Financial markets play an important role in creating liquidity for capitalist economies. Financial markets are transparent as they ensure that the prices set are efficient and appropriate.

Types of Financial Markets

Stock Markets

Stock markets are a place where trading of equities occur. Equity is the value of shares issued by the company. In a stock market, securities are traded via Primary Market and Secondary Market. In Primary Market, securities are issued to investors directly by the issuer. Companies raise capital by an Initial Public Offering(IPO). Primary markets are also known as New Issue Markets.

Secondary markets are where investors buy and sell securities they already own. The secondary market, also called the aftermarket and follow on public offering, is the financial market in which previously issued financial instruments are traded.

The most popular stock exchanges in India are National Stock Exchange(NSE) and Bombay Stock Exchange(BSE).

Bond Markets

The Bond Market is a marketplace where participants can issue new debt, known as primary market and buy and sell debt securities, known as secondary market. A bond is an financial instrument in which an investor loans money for a specific period of time at a pre-determined interest rate. Bonds are issues by  municipalities, states, and sovereign governments to finance projects and operations. Debt securities usually include bonds, but it may include notes, bills, and so for public and private expenditures.

Money Markets

Money Markets involves trading of securities that are highly liquid and are issued for short time period with low interest rates. Money market consists of various financial institutions and dealers, who seek to borrow or loan securities. Examples of securities traded in money markets are treasury bills, commercial papers and certificate of deposits. Money markets are considered a safe place to invest as they have high liquidity.

Money markets are Over-The-Counter(OTC) markets which means that they are not regulated and not structured. Money markets give lesser returns however they offer a variety of products.

Derivatives Market

Derivatives markets are financial markets for derivatives like futures, options, forwards, etc. Derivatives are financial instruments whose value is determined by the value of the financial instruments like bonds, commodities, currencies, interest rates, market indexes, and stocks. The four major types of derivative contracts are options, forwards, futures and swaps. Futures and Options are listed and traded on stock exchanges while forwards and swaps are not.

Forex Market

The forex (foreign exchange) market is a market where people can buy, trade, hedge, and speculate on currency pairs’ exchange rates. Because cash is the most liquid of assets, the Forex market is the most liquid in the world. The currency market conducts more than $5 trillion in daily transactions, which is higher than the combined volume of the futures and stock markets. The forex market, like the OTC markets, is decentralized and is made up of a global network of computers and brokers from all over the world. Banks, commercial companies, central banks, investment management firms, hedge funds, and retail forex brokers and investors make up the forex market.

Commodities Market

Commodities markets are gathering places for producers and consumers to trade physical commodities like maize, livestock, and soybeans, as well as energy goods (oil, gas, and carbon credits), precious metals (gold, silver, and platinum), and “soft” commodities (such as cotton, coffee, and sugar). Spot commodities markets are those where tangible things are exchanged for money.

Cryptocurrency Markets

Cryptocurrencies like Bitcoin and Ethereum, which are decentralised digital assets based on blockchain technology, have been introduced and have grown in popularity over the last few years. Hundreds of cryptocurrency tokens are now accessible and traded on a patchwork of independent online crypto exchanges throughout the world. These exchanges provide traders with digital wallets via which they can exchange one cryptocurrency for another or fiat currencies like dollars or euros.