Engineer's Finance

I am an adherent fan of Warren Edward Buffett. I love him for what he is. He is a great human being. He has billions of dollars and still he does not throw up his weight around. He is a living legend. All the investors want to just copy him and make millions just like him. He believes in value investing and living in frugality despite his immense wealth. To top it all he is a great philanthropist.

I love his rules for the playing the game. He has two rules and they are as follows:

Rule 1: Never lose money.

Rule 2: Never forget Rule no. 1.

That’s really nice. We all want that and that is what we crave for. He has lived life with these rules and I am not sure whether he has ever failed or not. It is great to be successful always in life. But I think he must have had a fall somewhere.

Buffett started his ventures quite early in life. When he was thirteen he ventured into stocks and real estate and when he was 15 years old, he along with a friend of his spent $25 to purchase a used pinball machine, which they placed in a barber shop. Within months, they owned three machines in different locations. This is why he has got into a position where we all love to reach. It is very difficult to start so early in life, I am 25 years old and have not had any business yet. I am working for someone else and making him rich and not myself and that is the truth. Most of us are just like this. We do not work for ourselves and we always want secure lifestyle. We study hard to become a slave. No matter whatever we study we end up being a slave to someone else. I don’t preach that everyone has to start a business or something; all that I would iterate is make yourself rich before making others. We have our own life to look after and it is important that we reach certain position in life.

Starting early in life gives us a leverage of making mistakes. If I had started investing when I was 20 years by now I would have learnt many things and would have made a descent amount of money. I don’t know how many will agree with me but this is truth, we can’t learn without making mistakes and when we start early we learn many things. We learn to get up after every fall this is much more important than anything else. We can also have the privilege of making mistakes and not repent much for it. Why I say this is because when you start early you will have less capital to begin with and if you lose that also it won’t hurt you that much. I am sure none will be dependent on you when you are very young. (I assume that most of us are from middle class family where parents do take care and don’t expect much from their sons and daughters). Even if we lose money we can always earn it and it is worth the experience. It teaches you millions of things which no one can teach.

My stand: start early in life and make mistakes, learn from it. Don’t keep working for someone else and make him rich, instead make yourself rich by working for you. Be your boss and live life happily.

Happy investing and All the best for the young guns!

I would suggest you to read the previous article before reading this.

What is meant by Futures Contract?

Consider this, You are using some Direct To Home (DTH) service. There are many DTH service providers. Say you have chosen X. Now you and company X get into a contract stating that you will be using their service from today to say an year exactly. You agree with the company as to how many channels you want and how and when you will make a payment. All this being done today for next one year. If there are variations in the price in the next one year, your contract with company X is honored and they can’t change it at a later date. In this way you are hedging the risk of price increase. The company makes a profit some how or the other, we will not think about it.

Similarly, think that there is a farmer who sells sugarcane to a sugar factory. Now the farmer says he will produce 1000 kgs of sugarcane and give it to buyer at Rs.10 per kg after 6 months. The buyer agrees for the contract. This is Futures contract. Buyer is not sure about the price and seller is also not sure, both are speculating the price. They come to final conclusion about the price assuming it is fair for both the parties. If the price of sugarcane increases after 6 months then buyer makes a profit if it falls then the seller makes a profit. So, a futures contract is an agreement between two parties: a short position – the party who agrees to deliver a commodity – and a long position – the party who agrees to receive a commodity. In the above scenario, the farmer would be the holder of the short position (agreeing to sell) while the buyer would be the holder of the long (agreeing to buy).

In every futures contract, everything is specified: the quantity and quality of the commodity, the specific price per unit, and the date and method of delivery. The “price” of a futures contract is represented by the agreed-upon price of the underlying commodity or financial instrument that will be delivered in the future.

Futures are one of the types of financial instrument. It is suitable for all speculators out there. Futures are suitable for only those who are not scared of losing and are not greedy.

Trading in Futures originated from Japan during 18th century. They were basically trading in silk and rice. A futures contract is a type of derivative instrument, or financial contract, in which two parties agree to transact a set of financial instruments or physical commodities for future delivery at a particular price. In other words, we are trading virtually. We just honor the contract and keep terms with it, that’s it. If you buy a futures contract, you are basically agreeing to buy something that a seller has not yet produced for a set price. But participating in the futures market does not necessarily mean that you will be responsible for receiving or delivering large inventories of physical commodities – remember, buyers and sellers in the futures market primarily enter into futures contracts to hedge risk or speculate rather than to exchange physical goods.

Trading in Futures is one of the riskiest and complex financial instruments and hence you don’t find many people in this region. But this is quite interesting. You can mint or lose money big time. This is actually wonderful. In my future articles I will write more about this.

There are various Investment Vehicles. Some of them are as follows :

1. Bonds

2. Stocks

3. Mutual Funds

4. Options

5. Futures

6. Forex

7. Real Estate

8. Gold

9. Commodities and so on….

I will briefly describe some of the Investment Vehicles in the future articles. I am particularly interested in the following : Stocks, Options, Futures and Real Estate.

What is meant by Bonds?

Bonds are the safest and the lowest yielding investment vehicle that one can get. Bonds are issued by the Government and certain companies. When you buy the bond, it means you are lending your money to these people and they in turn assure you to pay back your money with interest. It is risk free if the government is stable or the company is doing pretty well such as Power Corporation. The safety and stability, however, come at a cost. Because there is little risk, there is little potential return. As a result, the rate of return on bonds is generally lower than other securities.

I have described about Stocks and Mutual funds in my previous articles.

Now for Options and Futures, I will write about them in detail in the future articles. Since it is totally a vast topic and I need to explain much in that. It is really very interesting and I would love to explain you that in detail.

I think Gold and real estate everyone knows about it.

Commodities and Forex is of my interest as well. I have not played much with those so I can hardly tell you what it is. I too am learning about them. Once I get to know I shall update you.

Keep Visiting and Happy Investing.