If you already had all the money you ever needed, then you could safely avoid investing (or even saving). After all, the real purpose of investing in the stock market is to provide the required amount of money, when needed. Isn't it? But most people are not born millionaires. So they need to save and invest in the stock market. Now people tend to use both these terms (save/invest) interchangeably. But there is a big difference between these two terms and it is important to understand it. Saving is the process of putting aside money for short-term goals. Generally, saving doesn’t give inflation-beating returns. Inflation in India has averaged around 7% in the last decade. Most savings products give after-tax returns that are lower than inflation figures. So a bank FD giving 8% before-taxes, might only give 5.6% after-taxes (assuming 30% tax bracket). This means that your savings are not beating inflation. What exactly does this mean? Suppose an item costs Rs 1000 in the year 2014. Since inflation...

Compounding - Unfortunately, this is one concept which most people would have studied in school days, but no longer seem to remember.Caution: If you don’t understand this concept now, you can loose a lot of money in future.As a reminder, compounding refers to the re-investment of income at the same rate of return to constantly grow the principal amount, year after year. Suppose you put Rs 1,00,000 in a bank fixed deposit giving 8% annual returns (lets ignore taxes for simplicity). Now after a year, your principal of Rs 1,00,000 would have earned Rs 8000 in interest. If you reinvest that interest(Rs 8000) along with the original Rs 1,00,000, what will happen in next year?You will get another Rs 8000 from your original Rs 1,00,000 investment, plus Rs 640 from the reinvested Rs 8000. If you reinvest all your returns, the total value of your original Rs 1,00,000 investment after 5 years would be as follows: At end of Year 1: Rs 1,00,000 earns 8% = Rs 1,08,000 At...

Can you buy the same amount (value) of things for Rs 1000, that you were able to buy 5 years back?The answer is surely going to be a big ‘No’. After all, prices of almost everything are rising every year. This is what is generally referred to as the effect of inflation.On a similar note, a Rupee today is worth more than a rupee in future. Isn’t it? On a similar note, a Rupee today is worth more than a rupee in future. Isn’t it? It is because you can take a rupee today and earn interest/dividends/etc. on it. So it takes more than a rupee in the future, to equal a rupee today. This is what is broadly, the concept of time value of money. The money available today is worth more than the same amount in future, due to its potential earning capacity. Now within this idea of Time Value of Money, there are 2 important terms that everyone must be familiar with: Present Value (PV) To...