Deposits Vs Stock Markets
September 21st, 2006 |You need returns from your hard-earned money. Money remaining with you does not give you any returns. Only when you lend the money or you invest it you get returns. Deposits with companies or investing in stock markets can give you differing returns and differing control over your money. Read all about it in this article.
Deposits
Deposits with companies earn you returns of 3 to 5% depending on the company you keep the deposits. These are in form of unsecured deposits returnable at the end of the deposit period the money is returned along with accumulated interest. The interest that you get in the bargain is the return on your money for allowing the company to use your money.
The inflation eats in this money. The real income that you get from this money is the interest minus the inflation. With inflation of 2 to 3 % the real income may be in form of just 1 to 3 %. This may be very low compared to the possible returns from the stock markets where the returns of more than 20% can be expected.
The returns that you get are also taxable. Therefore the effective returns that you get from the deposits with the companies is about half or the third of the rate that you get from the company.
In case the company goes into liquidation, the deposits are just above the equity holders in the line of being getting their money. This is because of the fact that your deposits are in form of unsecured deposits and after the government dues, labor dues, and other creditor’s dues are paid, the deposits holders are repaid and then if the money remains to be distributed, the money is aid to all the shareholders proportionate to the number of shares they hold.
Stock Markets.
The stock markets are a different kettle of fish altogether. The money that you invest in stock will not used directly in to product manufacture or services unless you buy the stock in initial public offer.
When you buy the stock of a company, you become a part owner of the company and share the profits and loss like the other shareholders of the company. When the company makes profit, you get money in form of dividends declared by the company. This is an annual feature and the dividend is approved during the annual general meeting of the company. It is paid to the members of the company who have not sold the shares on a particular date or during a particular period when the member’s register is closed.
While you get the dividend, the shares of the company continue to be exchanged in the market. The asking and the accepting price will depend on the financial projection of the company. The higher the profit the higher is the share price of the company.
When you sell the shares of the company, you cease to be a member of the company and you cannot derive any more benefits from the company. The numbers of shares you hold in a company are to be decided by you and there is no compulsion to buy a certain number of shares.
The dividends are paid on the face value of the share purchased and not on the value of the shares in the market. Thus a share having face value of $1 will get only $0.5 if 50% dividend is declared. If you have purchased the share at $ 50 or $90 you still get only $0.5 as dividend. In some countries, the dividends that you have received are free of income tax.
You get double benefit from the company. While the company gives you the benefits in form of dividends, the company shares go up value in stock exchange and you are benefited by the rise in stock value.
So with stock markets you get more profit but the risk is also higher as your money paid for getting the shares from markets can go down in values and if you sell the shares, you might not get the money you invested.
This is not the case with company deposits. You get your money unless the company goes into liquidation.
High-risk high- gain is the motto when you go for investment in stock markets.
