I was talking to my relatives and friends about the current market situations, we all had lot of questions on each aspect of the markets, jobs, savings, and also future perspectives. Below I did some work and picked up those lines which we had discussed over phone calls, discussions which happened during office lunch hours. I also visited lot of websites to gather some basic information about the subject as well, below is the snapshot of the same in FAQ
form...
DISCLAIMER - I admit, I am not a financial expert, and I do not even have a good theoretical/practical experience in finance. I just read the news paper, blogs, articles in magazines and talking with friends, relatives and also to those who are experts and having some experience of the finance, which I’m happy to share.
I hope you and your family will be secure, live a healthy, wealthy and happy life and prepared in the event of any kind of Recession.
I am always on learning mode, please correct me wherever you think - it could be anything like technical part, look-n-feel, English grammar, way of explanation or the way to publish articles.
The motto is to share the knowledge to the world what I have.
Question: These days I always heard about growth and recession stories, can you explain this in detail?
Answer: Very true, these days it seems to be very common to hear about recessions and growth stories in news papers, media, offices, metros, at bus stop, railway stations and many more countless places.
Economist says, growth means increase in the number of goods, services (also called as productivity) that an economy produces over time. Meaning more jobs are created, higher wages. It reflects the improvement in country's standard of living.
Economic growth is measured as a percentage change in the Gross Domestic Product (GDP) or Gross National Product (GNP). These two measures, which are calculated slightly differently, total the amounts paid for the goods and services that a country produced.
As an example of measuring economic growth, an indistry (or a country) which creates Rupees 9,000 in goods and services in 2010 and then creates 9,090 in 2011, has an economic growth rate of 1% for 2011.
Recession is when growth slows, the economy contracts. Usually due to drop in sales, fall-off in consumer demand, businesses stop expanding. Soon afterwards, it includes stop hiring new workers, and finally layoffs begins. In recession, GDP growth must be negative for two consecutive quarters or more. A good example was the stock market crash and subsequent economic downturn in 2000. Another good example is the most recent recession which happened in year 2008, also known as The Great Recession. The only good thing about a recession is that it cures inflation.
Question: How you say the country's standard of living has been improved?
Answer: GDP per capita is often considered an indicator of a country's standard of living. "Per capita" is commonly used in statistics, in simpler terms it means "for each person" or "per person"
GDP per person is when you take the entire output of a country's economy and divide it by the number of its citizens.
GDP per person allows you to compare the prosperity of countries with different sizes. For example, GDP in the U.S. is $14.7 trillion, which is one of the largest. This makes it seem the U.S. is the most prosperous country in the world. (The EU is actually the largest economy, at $14.9 trillion -- but it's an economy made up of 29 separate countries).
However, its prosperity is because it is the third most populous country in the world. Its GDP per person is $47,400, still pretty good -- it's the 10th most prosperous country per person. The most prosperous country per person is Qatar -- its GDP per person is $147,500 (All figures are 2010 estimates from the CIA World Factbook).
The standard of living is closely related to quality of life. It refers to the level of wealth, comfort, material goods, quality and affordability of housing, number of vacation days per year, affordable access to quality healthcare, quality of education, life expectancy, infrastructure, environmental quality, climate and safety.
The GDP growth rate measures how fast the economy is growing. Technically, it is the percentage increase or decrease of GDP (Gross Domestic Product)compared to the previous quarter. The GDP growth rate is driven by retail expenditures, government spending, exports and inventory levels.
So, if your country is growing then it means your standard of living will be improving.
Here you find the economy of India: http://en.wikipedia.org/wiki/Economy_of_India
India's per capita income (nominal) is $1220, ranked 142nd in the world, while its per capita purchasing power parity(PPP) of US $3,665 is ranked 129th.
It is estimated that India's Per Capita Income will register an average growth rate of 12% during 2011-20 so as to reach $3,790 by 2020. In the year 2020 India's real GDP is projected to be at $4.42 trillions & per capita Nominal GDP would be at $3,225. India's per capita purchasing power parity(PPP) will be at $9,875 in the year 2020.
Question: What is GDP (Gross domestic product)?
Answer: Economic growth is measured by the percentage increase or decrease of GDP (Gross domestic product) compared to the previous quarter. The GDP growth rate is driven by retail expenditures, government spendings, exports and inventory levels.
Rises in imports and reduction in exports will negatively affect the economic growth.
The GDP growth rate is the most important indicator of economic health. If it is growing, if it is growing, then it means business, jobs and personal income will be increased.
If the GDP is slowing down, then businesses will hold off new investments and hiring of new employees, waiting to see if the economy will improve. This, in turn, can easily further depress the economy and consumers have less money to spend on purchases. It turns down the GDP growth rate to negative. And if the GDP turns down to negative numbers then it is heading towards the recession.
When the economy is expanding, the GDP growth rate is positive, which means the country is growing.
GDP is calculated in various ways, you can get complete description and it's components in details here -
http://en.wikipedia.org/wiki/Gross_Domestic_Product
A good way to compare GDP between countries is with GDP per capita. This divides the country's economic output by the number of people. It gives a good indication of how wealthy each person feels.
Question: In the first question you also talked about recession, and these days I am also hearing about credit ratings as well. What does it means?
Answer: A credit rating evaluates the credit worthiness of a debt issuer. Debt issued by a business enterprise, a corporation or a government.It is an evaluation made by credit rating agency. Evaluation involves the qualitative and quantitative information for a company or a government; including non-public information obtained by the credit rating agencies analysts.
In the simple terms, credit rating indicates the rating agency’s opinion on particular country or company’s repayment capacity of the debt. This rating helps to judge whether that company or country can repay the debt on time.
Credit ratings are not calculated based on mathematical formulas. Instead, credit rating agencies use their judgment and experience in determining what public and private information should be considered in giving a rating to a particular company or government.
The credit rating is used by individuals and entities that purchase the bonds issued by companies and governments to determine the likelihood that the government will pay its bond obligations.
A poor credit rating indicates a credit rating agency's opinion that the company or government has a high risk of defaulting.
Question: I keep on hearing credit scores while my friends/relatives takes loan from the banks. Are both credit scores and credit rating are same?
Answer: No these two are completely different. Credit ratings are often confused with credit scores. 'Credit Ratings' is not based on any mathematical formula, it is purely an analysis. Credit ratings are meant for a business enterprise, a corporation or a government. It tells there worthiness.On the other hand, 'Credit Scores' are meant for an Individual and completely based on the mathematical formula. Credit scores are the output of mathematical calculations that assign numerical values to information in an individual's credit report.
The credit report contains information regarding the financial history and current assets and liabilities of an individual including information about late payments .
A bank or credit card company will use the credit score to estimate the probability that the individual will pay back loan or will pay back charges on a credit card.
A poor credit score indicates that in the past, other individuals with similar credit reports defaulted on loans.
Note: - Credit history, credit report or credit scores all are related.
Question: Does a credit rating assure repayment?
Answer: A credit rating is not an assurance of repayment of the rated instrument. Rather, it is an opinion on the relative degree of risk associated with such repayment. This opinion represents a probabilistic estimate of the likelihood of default.
Question: What do the various credit rating symbols mean?
Answer: CRISIL uses simple alphanumeric symbols to convey credit ratings. CRISIL assigns credit ratings to debt obligations on three basic scales: the long-term scale, the short-term scale, and the fixed deposit scale. To illustrate, CRISIL's long-term credit rating scale and the description associated with each category on the rating scale is given below:
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Symbol
Description
(Rating category).
(with regard to the likelihood of meeting the debt obligations on time)
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AAA
Highest Safety
AA
High Safety
A
Adequate Safety
BBB
Moderate Safety
BB
Inadequate Safety
B
High Risk
C
Substantial Risk
D
Default
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Question: What are popular Credit Rating Agencies?
Answer: Credit rating has been given by the number of companies in the world. There are companies who give the credit rating for companies and few companies rate the country. The following is the list of few popular rating agencies across the world:
* Moody’s Analytics
* Fitch Group
* Standard & Poor’s
* CRISIL
* A. M. Best
* Morningstar, Inc.
S & P is the third most popular credit rating agency. Moody’s and Fitch are the first two popular rating agency. They both maintain the same rating for USA and will continue the same. Also Fitch has indicated that after this month it will review the rating for USA.
S & P said in the recent statement that India, Japan and other Asian countries to maintain the balance sheet healthy. Otherwise it would downgrade the rating for these countries.
Question: Why The US Credit Rating Was Downgraded?
Answer: The reason was the ability to repay the debt.
On August 5th, Standard & Poor’s (S&P), one of three major rating agencies, downgraded the U.S. from AAA (triple 'A') rating to AA+ (double 'A' plus) rating, the first such downgrade in the history of the United States.
Some facts: -
- In year 2008 year end, total federal debt was $10.7 trillion
- Currently it is $14.6 trillion.
"Debt as a percentage of GDP was a painful 69 percent at the end of the Bush years, but Mr. Obama is pushing it over 100 percent, another disgraceful historic milestone."
Why S&P downgraded -
• U.S. Tax revenue: $2,170,000,000,000
• Federal budget: $3,820,000,000,000
• New debt: $ 1,650,000,000,000
• National debt: $14,271,000,000,000
• Recent budget cut: $ 38,500,000,000
Let’s remove 8 zeros and just consider it as a household budget:
• Annual family income: $21,700
• Money the family spent: $38,200
• New debt on the credit card: $16,500
• Outstanding balance on the credit card: $142,710
• Total budget cuts: $385
Do you think this family deserves an AAA credit score?
Would you lend this family money?
And if you have already lend money to this family then, definitely you ask back your money before this family gets default, because you have the fear that this family may default.
In more detail for US downgrade, read the below article: -
The 3 U.S. Policy Mistakes Most Responsible for S&P Downgrade
Question: I also heard people talking about "Double Dip Recession" in my office. What is a "Double Dip Recession"?
Answer: Some people says United States (U.S.) is likely moving back again into recession. Such a move would bring United States into a "Double Dip Recession".
Double Dip Recession appears when Gross Domestic Product (GDP) growth slides down to negative after couple of quarter show casing the positive growth.
A double-dip recession refers to another recession followed by a short-lived recovery after a recession.
The causes for a double-dip recession vary but often include a slowdown in the demand for goods and services because of layoffs and spending cutbacks from the previous downturn. It is also called as W-Shaped recesion, because it shows two V-shape recession and in between a short recovery. Many experts in the economic and financial sector have voiced concern.
What It Means to You
Whether the economy is a U or a W, life will not be returning to "normal" for quite a while. A healthy economy requires 2-3% GDP growth and 150,000 new jobs per month. This probably won't happen until banks return to normal lending activity, no matter how much the government spends.
Question: Hmm interesting, are there any other kinds of recessions?
Answer: Offcourse yes, there are L, U, V or W-shaped recession.
V-Shaped recession - It is similar to the ones in 1990 and 2001. This is one that is very deep, but short-lived and bounces back strongly. A clear example of a v-shaped recession is the Recession of 1953 in the United States.
W-Shaped recession - It is also called as double-dip recession, it refers to a recession followed by a short-lived recovery, followed by another recession . The early 1980s recession in the United States is cited as an example of a W-shaped recession.
U-Shaped recession - It has a longer decline before it bounces back. It is longer than a U and V-shaped recession. The 1973–75 recession can be considered a U-shaped recession.
L-shaped recession - An L-shaped recession occurs when an economy has a severe recession and does not return to trend line growth for many years, if ever. The steep drop, followed by a flat line makes the shape of an L. This is the most severe of the different shapes of recession. A classic example of an L-shaped recession occurred in Japan following the bursting of the Japanese asset price bubble in 1990.
Question: Recently in a debate in news channel I listen a guy coined a term "Economic Depression". What's that?
Answer: There is no agreed definition of the term depression, though some have been proposed. It is a more severe downturn than a recession, it lasts several years. Fortunately, the U.S. economy has not experienced an economic depression since The Great Depression of 1929-30, which lasted ten years.
By 1933, the height of the Depression, unemployment had risen from 3% to 25% of the nation’s workforce. Wages for those who still had jobs fell 42%. GDP was cut in half, from $103 to $55 billion.
Question: What Ended the Great Depression of 1929?
Answer: In 1932, Franklin Delano Roosevelt was elected President based on his promises to create Federal Government programs to end the Great Depression. Within 100 days the “New Deal” was signed into law. This created 42 new agencies designed to create jobs, allow unionization, and provide unemployment insurance. Many of these programs, such as Social Security, the SEC (Securities and Exchange Commission), and FDIC (Federal Deposit Insurance Corporation) are still here today, helping to safeguard the economy.
However, the extent of the Great Depression was so great that government programs alone could not end it. Unemployment remained in the double-digits until 1941, when the U.S. entry into World War II created defense-related jobs.
Question: Could a Great Depression Happen Again?
Answer: A Depression on the scale of that in 1929 could not happen exactly the way it did before. Central banks around the world, including the U.S. Federal Reserve, are so much more aware of the importance of monetary policy in regulating the economy.
The current thinking is that a Great Depression could not happen again because the global economy is much more integrated, and all central banks are working together to make sure it doesn’t.
Question: Does the downgrade of US will make any impact on Indian economy?
Answer: You know most of the countries in this world works for US, or you can say these countries generates economy by exporting items to US.
Japan exports Cars, etc; CHina exports, laptop, toys, electronic goods etc; India exports textiles, software etc, and many more.
So in case, if US economy hits, it definitely impact all its depending countries. In case of India, India exports almost 1 out of every 15 items to US, with fears of default, there is worry in the order books. Importers in US may hold back the new orders because of slodown in the US. So definitely it affect all the countries of the world in direct or in-direct way.
Question: So, it seems the job does not look safe.
Answer: You can say yes or no, it is both. Let see how it is going further in US, there are lot of meetings happening accross the globe, let see the outcome of those. It may be a good or a bad new for whole world.
In case if the economy comes under the grip of recession again, then the most affected sectors will be the exports sector, it may include textile, software, IT enabled services etc.
Let say if you are working with a company that exports goods or services to US or the European Union, then your company may face the heat/pressure on orders, and ultimately it affects an individual's job. Because the company definitely will stop the new hiring process as there may be fear of another recession.
But as I said, it is still too early to say about the recession.
Question: How this crisis is different from 2008 crisis?
Answer: The 2008 crisis (also called as SubPrime Crisis) was triggered off by defaults in real estate loans by borrowers with poor credit records, low income and no job security. While the current crisis is all about the government's inability to repay the debt.
Question: Why there is a panic in the stock market?
Answer: Panic in the market is among day traders and brokers who do not bound for a week or a month for returns. It seems the panic will not be for longer period. Indian market falls along with the global market but it is only for short period because the Indian economy seems to be standing on the strong foundation.
The fundamentals of Indian market are very strong and India is strong and growing economy, so no worry with repspect to the Indian market. For longer run it is the best time to invest in the Indian market as it is the world's second most fastest and safe economy.
Question: Hmm, then it seems to be a good time to buy stocks.
Answer: Definitely, it is a good time but invest your money systematically and in planned way. Do not put all your hard earned money at once. If you are investing your money, then invest it for longer horizon.
Following are the points you need to take care before investing: -
- Before you can invest, you need money. Don't start investing until you have a secure job and six to twelve months of living expenses in a savings account, as an emergency fund, in case you lose your job.
- Before you start investing, you need a basic understanding of what a stock is, what it means to invest, and how to evaluate stocks.
- You should have several reasons to buy a stock, otherwise do not buy it.
- If you have more than Rupees 100,000 to invest, however, individual stocks are generally preferable to mutual funds, because all funds charge fees proportional to the size of the asset. Prepare a small portfolio start investing on companies having strong fundamentals.
- Diversify your money, it means, don't put all money in one company. Buy in different sectors like OIL, Banks, IT, Metals, Bullion etc etc
- Hold for long term.
WARNING: - Just because the stock market has declined by a substantial amount does not mean that it can not decline even further. There are risks associated with investing in stocks regardless of whether you invest in an up market or a down market. You must take precautions with all of your investments. Keep up to date on the news relating to the companies you invest in. Read analyst research that is available to you through your brokerage firm. Consider placing stop loss orders to limit the amount you can lose on your investment.
Question: How will you protect you and your family in recession or say in your bad times?
Answer: Do not get panic, take a deep breath and plan yourself. Indians shouldn't worry as India is a growing economy and you must get job to survive irrespective of what salary you get. Also, Indians have the tendency to invest for future and there kids. So, either your parents must have kept money for you or you yourself have invested knowingly or unknowingly.
Ways to make yourself into safe hands: -
- First: Always have emergency funds like liquid money, investments in bulions (Gold/Silver), government funds, fixed deposits etc. You must have access to money (emergency fubds) in case of a layoff or cut in pay.
- Second: Diversify your money. If you invest mostly in equities and on one kind of share then it may hurt you economically whatever the company's fundamentals are. ! Don’t have all your money invested in one place. Remember Grandma’s saying "Don’t keep all your eggs in one basket." This is what she meant. Savings, varied stocks, money market, savings bonds are all areas to consider. Also, look to the long term. Don’t sell your stock at the first drop in the market. Patience and vigilance! Watch for a cyclic pattern. Invest in bullion (Gold/Silver), invest in government debt bonds, invest in stocks and it must be diversified.
- Third: Our elder and wise people says: Live simply that others might simply live. Don’t live above your means. Be thrifty and conservative. Avoid using credit whenever possible. Put off unnecessary spending until the economy improves. If you and your partner are a two income family, try to live on one of those salaries and bank the other. Not only will you gain wealth, but you will be prepared in case one partner is laid off or experiences a pay cut.
- Fourth: Be careful with your credit score. It’s better to have a few older credit cards than several new ones. Pay bills on time and if possible, pay more than the minimum payment. Your credit will improve, you’ll save a huge amount of money, and you’ll pay debts off more quickly.
- Fifth: Find a financial adviser you can trust and who has a good history of wise investments. These days, financial matters are so complex that there is no shame in admitting you have no idea what’s going on! When you are confused or feel like you don’t have a full grasp of the situation, just call your financial adviser and he explains it in simple English or your local language, so that you can make an intelligent decision.
- Sixth: During recession, you must dedicate yourself in learning new things. If you are jobless and you have some money than either go for some higher education or plan for some professional certification courses which will add weight-age to your resume and it may be booster to your career, you may move up the ladder and it increases your salary as well.
I did the sneakpeek from these places -
- Friends
- Relatives
- Couple of blogs and websites: -
