This blog post is the biography of Abraham Lincoln. Abraham Lincoln was an American lawyer who served as the 16th president of the United States of America. He is best known for strengthening the U.S. economy and abolishing slavery while leading the nation through a political turmoil.
Abraham Lincoln grew up working on a farm. The entire amount of time he spent at school in his lifetime was less than a year. But that did not stop him from learning. He educated himself by reading books, often borrowed from others after walking several miles at a stretch.
Abraham Lincoln suffered from clinical depression almost all his life. Throughout his life, he lost people very close to him. His mother died when he was nine years old; his sister died when he was 19 years old; two of his four sons died before him. All these incidents devastated him and worsened his depression.
Yet, despite suffering so much in life, Abraham Lincoln did not give up. He fought all the odds stacked against him and became the 16th president of the USA. His feats as a president not only earned him a permanent place in Mount Rushmore, but also a permanent place in people’s hearts.
Read this biography of Abraham Lincoln and find out how Abraham Lincoln rose from nothing to become one of the most cherished presidents. Get a glimpse into the heartbreaking yet inspiring story of a man who lived a hero and died a martyr.
Early life
Birth
Abraham Lincoln was born on 12th February 1809, to Thomas Lincoln and Nancy Hanks Lincoln. His mother gave birth to him in a one-room log cabin where the Lincoln family had settled after years of migration through parts of Virginia, Pennsylvania, and New Jersey. Abraham had two siblings – an elder sister and a younger brother. His younger brother passed away when Abraham was three or four years old.
Moving to Indiana
When Abraham was seven years old, his family moved to Indiana, where his father had purchased 40 acres of land. Abraham’s first year in Indiana was lonely because there weren’t any children of his age in the neighborhood. His loneliness was only broken when the family of his mother’s aunt came to stay with them. Abraham developed an instant liking to his mother’s cousin and considered him his older friend.
Losing his mother and sister
A year later, a disease called milk sickness started to spread rampantly. It was caused by drinking the milk of a cow that had eaten a dangerous plant. The uncle and aunt of Abraham’s mother died because of it. Within a few months, Abraham’s mother died because of the same sickness too. This left the 9-year-old Abraham and his family completely broken. After one year, to fill in the gap left by his mother and to rebuild the broken family, his father married a widow. Abraham soon developed a special bond with his stepmother. In his later life, when talking about her, he would refer to her as his mother.Ten years after his biological mother’s death, Abraham would again be devastated by another tragic incident. His elder sister would pass away while giving birth, leaving Abraham and his family in utter grief. The deaths of his brother, mother, and sister made his childhood unbearably miserable and continued to haunt him throughout his life.
Depression
Clinical depression
Abraham Lincoln suffered from clinical depression almost all his life. He might have inherited the vulnerability for depression from his parents, who themselves suffered from it. Moreover, losing his mother and sister could have worsened his depression.
At times, he suffered from major depressive episodes, feeling worthless and even wanting to commit suicide. He once told his law partner, “I am now the most miserable man living… Whether I shall ever be better I cannot tell; I awfully forebode I shall not.”
This shows that Abraham Lincoln was always depressed. But because he was always depressed, he was never egoistic. He was open to learning from others, even if they were his enemies. So, he appointed his former political opponents in his cabinet.
Being open about his depression
During Lincoln’s time, depression was considered a weakness. So, many people hid it from their friends and family. But Abraham Lincoln did not hide it from his friends. He even told his friends that the world was a hard and grim place to live.
However, his depression made him more empathetic to others, and his openness about it made him more approachable. This could have been one of the reasons for people choosing him as the president.
Surviving depression
Even though Lincoln suffered from overwhelming depression, he found ways to overcome it. He often used humor to momentarily forget his problems.
Since Lincoln often felt worthless due to his depression, he was always searching for a purpose for his existence. In his later years, he found this purpose, which was to hold his country together and abolish slavery. This gave him a reason to live, even when he wanted to die.
Passion for learning
The Lincolns
Abraham Lincoln came from a family of adventurers. His ancestor Samuel Lincoln is one of the thousands of people who moved from England to the unexplored USA in the 1600s in hopes of higher wages. In the USA, he started his life as a farmer. With time, he tried different business ventures, made enough money, and built a big house.
His subsequent generations carried his sense of love for adventure. They moved to unexplored areas within the USA and gathered a significant amount of wealth there.
However, among all the Lincolns, Abraham Lincoln was different. If the previous generations of Lincolns were driven by their love for the land, Abraham Lincoln was driven by his unquenchable thirst for knowledge. It helped him overcome the overwhelming sense of sorrow engulfing him.
Abraham Lincoln was an avid reader since childhood and hated the laborious farm life. Even though he started working on the farm early to help his father, he used his spare time to read.
Early education
When Abraham Lincoln came to Indiana at the age of seven, there were little educational opportunities for children. Indeed, the first school was established only three years later. So, most children were taught informally. Lincoln, too, was taught to read and write by his mother’s cousin.But he also took intermittent lessons from teachers in blab schools. In these schools, students learned to read by repeating what the teachers taught them. So, Abraham Lincoln learned by reading and reciting his lessons aloud and repeating them over and over. This habit stayed with Abraham Lincoln for the rest of his life. So, he always read aloud. Young Abraham read everything he could get his hands on. He read storybooks, newspapers, spelling books, songbooks, etc. Some of the first books he read were Robinson Crusoe, the Bible, Life and Memorable Actions of George Washington, and Aesop’s fables. Sometimes, he would walk for several miles to borrow a single book. Such was his passion for learning.
Those days, the paper was a scarce resource. So, the students did calculations on boards, which they cleaned and reused. However, the little Abraham somehow managed to get some sheets of paper, sewed them together and created a sum book.
In 1831, Lincoln and his few friends transported goods from New Salem to New Orleans and sold them. It was here that Lincoln saw the ground picture of slavery. Then, one of these friends started a general store, and Lincoln started working for him.
In 1832, Lincoln entered politics. He contested in the Illinois state assembly. But he lost in it.
The same year, the general store closed down, and Lincoln lost his job. After losing his job, Lincoln volunteered to fight in the Black Hawk War, which started soon after. In this war, hundreds of Native Americans fought the USA.
Even though Abraham Lincoln never saw actual combat during that war, he was selected as the captain of his unit. Lincoln later remarked that being chosen as the captain by his peers gave him more pleasure than anything else.
After the war, he returned and served as a postmaster of New Salem and later its county surveyor.
In 1834, Abraham Lincoln contested in the Illinois state assembly elections once again. However, this time, he won the election. Indeed, he won the next three elections as well. He served a total of four terms in the Illinois House of Representatives from 1834 to 1842.
Becoming a lawyer
After his successful election into the Illinois state assembly in 1834, Lincoln decided to pursue law and become a lawyer. Afterall, courtrooms were not new to Abraham Lincoln. His father often visited courtrooms when they were still in Kentucky. He might have taken young Abraham with him. Moreover, after they moved to Indiana, Lincoln went to courtrooms to observe lawyers with good oratory skills argue with each other. There he noticed that lawyers often referred to books like the United States Constitution and the Declaration of Independence. So, he read all these books thoroughly. In 1835, Abraham Lincoln started to study law on his own. He read law using books borrowed from a law firm and a judge. In September of the following year, after passing an oral examination, he got the license to practice law. He began his practice soon after.
His personal life
He met his first love interest in the following years, but she passed away due to typhoid fever. He then met another woman, but the relationship died after they both agreed that it was not working. In 1839, Lincoln met Mary Todd, a woman who later became his wife and mother of his children. They got married in 1842. The couple settled in Springfield near Lincoln’s law office. The couple had four sons, two of whom died aged 4 and 12 due to tuberculosis and typhoid fever, respectively.
The 16th President of the USA
Entering the U.S House of Representatives
In 1843, Lincoln decided to contest the election for the United States House of Representatives from the seventh Congressional district. However, the Whig party, in which Lincoln was a member, nominated John J. Hardin. So, he couldn’t get a nomination for that election. However, in 1846, his party nominated him. He won his opponent by securing 56% of the votes and became an active member of the House of Representatives. He even introduced the house to a bill to abolish slavery. But he dropped it when it got no support from his own party. He extended his support to nominate General Zachary Taylor in the 1848 presidential elections. Taylor won and became the president of the USA. After Taylor won, Lincoln was not given a post he anticipated. So, he decided to continue his law practice as the given post would have ended his political career in Illinois. He won many cases as a lawyer. Due to his clean reputation, he came to be known as ‘Honest Abe.’
The Kansas-Nebraska act
For several decades, the abolition of slavery has been a heated topic in the USA. It divided the USA into two factions demographically- the northern and the southern states. The southern states wanted to expand slavery, whereas the northern states wanted to abolish it.
In the 1850s, when the USA was expanding, deciding if the newly acquired states should abolish slavery or not, became a big problem. So, a Democratic senator called Stephen Douglas proposed a solution. This solution, passed in 1854 as the Kansas-Nebraska act, aimed to let the people of the states decide if they wanted slavery or not.
This upset the delicate balance between the northern states and the southern states, which were equal in number. As a result, a civil war in the country between the northern and southern states became inevitable.
This act also annoyed the northern Democrats who opposed slavery. So, they quit the party and joined the relatively new Republican party.
Re-emergence as a leader
The Kansas-Nebraska act made Lincoln enter politics once again. He opposed this act strongly as he opposed slavery in all forms in all his speeches. So, he joined the republicans in the year 1856 and became a leader of the republicans in Illinois soon after. In the 1856 U.S. Senate elections, Abraham Lincoln contested against Stephen Douglas. Even though he lost that election after a series of moving debates, Lincoln’s presence in the political scene made him a favorite among the masses. People called him the next republican presidential candidate.
The 16th president of the United States of America
For the 1860 presidential elections, Abraham Lincoln was chosen as the presidential candidate by his party. Ironically, Lincoln never gave any speeches during his campaign. He let his life story play its part.
However, other Republicans supported him with their speeches. They developed such elaborate campaigns portraying Abraham Lincoln as a hero. Other candidates looked so small and weak in front of Lincoln and his story.
The heroic story of a poor farm boy who becomes the president of the USA appealed to the vast majority of the people. So, Abraham Lincoln won the election and become the president of the USA on 6th November 1860. He was the first Republican leader to do so.
He had gathered votes majorly from the northern states as none of the slaveholding southern states supported him due to his stand against slavery. In the run-up to his inauguration, he tried to convince the southern states for a political compromise. But none of his efforts made any difference.
The seven slaveholding southern states left the USA, which was also called the Union back then. They formed their own sovereign nation called the Confederate States of America or the Confederates.
Abolishing Slavery
In the following four years, Lincoln braved the civil war and painstakingly rallied to bring the states into the Union. He had many health issues during the time, including depression, for which he took mercury pills that affected his health. The trauma of losing a son during his presidential term also added to his depressed mental state.
In 1862, Lincoln signed the Emancipation Proclamation, giving freedom to slaves of ten states that didn’t fall under the Union. This proclamation freed 3.9 million slaves. This convinced Lincoln that they can put an end to slavery if they fought strongly.
Those who deny freedom to others, deserve it not for themselves – Abraham Lincoln
Successful re-election and reconstruction of southern states
In 1864, Lincoln successfully managed his second presidential campaign and was re-elected in November. He delivered his 2nd inaugural address in 1865. He diverted all his efforts to re-establish the southern states that had withstood the worst of the war. Lincoln rallied to pass a constitutional amendment that aimed to abolish slavery. In his 2nd attempt, he gathered the majority and passed the amendment. This came to be known as the 13th amendment to the U.S. constitution.
Assassination
On the evening of 14th April 1865, Lincoln had gone to enjoy a play with his wife and general Grant.
John Wilkes Booth, a confederate spy and actor, had attended Lincoln’s speech on 11th April 1865. In this speech, Lincoln had spoken about bringing voting rights for black people. Hearing that, Booth decided to assassinate Lincoln and his allies.
While the murder attempts on Lincoln’s allies failed, Booth successfully entered Lincoln’s theatre box and shot him in the head. Lincoln remained in a coma for the next nine hours and succumbed to his injuries on the morning of 15th April 1865. Vice president Andrew Johnson was sworn in as the president the next morning.
Booth, Lincoln’s murderer, was spotted in a farm in Virginia after two weeks. He had to be killed as he refused to surrender to the police.
Lincoln was laid to rest after his body was taken in a funeral train all throughout the country, so that mourning citizens could take a last look at their president. An estimated 25 million people attended his memorial service. He was buried in the Oak Ridge Cemetery in Springfield. His wife and sons are also buried in the same cemetery.
There were some attempts to steal Lincoln’s remains in the following years, but they were all prevented. Lincoln’s tomb has been opened 5 times, and his remains have been moved 17 times to date.
Legacy
Lincoln was one of the greatest presidents America has ever seen. His portrait can be seen on the $5 bill and penny. His image was also carved on the Mount Rushmore memorial that features the four U.S presidents who personify America’s story. Many stamps feature him, and many other memorials are dedicated to him in different parts of the country.
The Lincoln Memorial in Washington is one of the most popular tourist destinations in the country. It houses many memorabilia from Lincoln’s personal life and office tenure. He has been a subject of many Hollywood films and has been portrayed as one of America’s greatest heroes. President Barack Obama named Abraham Lincoln as his favorite president. He used Lincoln’s Bible for his oath ceremony as a tribute to the president.
Facts you probably didn’t know
Lincoln is the one who declared the final Thursday of November to be celebrated as the national Thanksgiving holiday. (Source)
Lincoln’s bodyguard was missing when Lincoln was assassinated. (source)
He took part in wrestling matches before he became actively involved in politics.
Lincoln was an animal lover and would have opened an animal shelter after his retirement if he was not assassinated.
He survived an assassination attempt in the year 1864 as the bullet fired at him hit his hat.
It was claimed that Lincoln’s health started to deteriorate even before his assassination. He had developed a rare genetic disease that led to muscle wastage. (Source)
We hope this biography of Abraham Lincoln helped you learn about Abraham Lincoln, his life and his achievements. He was constantly depressed almost all his life. Yet, he found a reason to live, remained trued to his country and people and carved his name in history.
So, whenever you are in a dire situation and doing something illegal looks like the easy way out, remember what Abraham Lincoln said:
Whatever you are, be a good one– Abraham Lincoln
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In this blog post, read the biography of Helen Keller, a deaf and blind woman who overcame her disabilities and became an American political activist, author, and lecturer.
Helen Keller
Unlike many other deaf and blind people, Helen Heller was not born deaf and blind. She was born a healthy child. However, when she was almost 19 months old, she contracted an illness that left her deaf and blind. This devastated her world as it took away her ability to understand the things happening around her. Despite her disabilities, she accomplished several feats that made her famous throughout the world. When she was 23 years old, she published her first book. At the age of 24, she became a graduate, a feat not achieved by any other deaf-blind person before. At the age of 33, she became a lecturer for the American Foundation for the Blind.
She traveled the world and worked for the cause of women’s rights, labor rights, and anti-militarism. How can a woman who couldn’t even see or hear become one of the best humanitarians of the twentieth century? Read the biography of Helen Keller to find out how she overcame her disabilities. Get a glimpse into her tragic yet profound story.
Childhood
Birth
Helen Keller was born in 1880 in Alabama to Arthur Henry Keller and Catherine Everett Keller. Her father was a newspaper editor and a captain in the Confederate Army. Her mother was the daughter of a general in the Confederate Army. Helen Keller had two siblings and two half-siblings from her father’s earlier marriage. Contrary to most cases, Helen was not born blind and deaf. She was healthy when she was born.
Mysterious illness
When she was 19 months old, Helen Keller contracted a mysterious illness, which left her deaf and blind. It was described by doctors as an acute congestion of the brain and stomach. Reports later suggested that the disease could have been meningitis or scarlet fever. This illness left Helen completely devastated. She had no idea of what was going on around her as nobody knew how to communicate with her. With age, Helen learned a few signs that helped her convey her needs to her family. When she was seven years old, she could even identify people using the vibration from their footsteps.
The unruly kid
Her parents showed extra care for her because of her disability. Since she was a kid, she used this to her advantage and got whatever she wanted by throwing temper tantrums. She dominated the entire household and terrorized the servants.But her parents did not do anything against it because they did not know how to communicate with her. So, they gave in to her tantrums, instead of teaching her to behave properly.
Sentences are the basic building blocks of languages. But sentences themselves are made up of different words like nouns, verbs, prepositions, etc. So, we can say that learning a language without learning its words is impossible. However, Helen did not know about the existence of words. So, she did not know that everything around her has a name, and she can refer to an object using its name. For example, she can touch a table and know that it is there. But she didn’t know that a table can be called a table. Since she did not know the existence of words, she couldn’t form sentences either. So, she couldn’t form proper thoughts inside her brain since most of our thoughts are in the form of sentences. This could have, in turn, frustrated her and made her unruly and wild.
One book that changed everything
When she was six years old, her mother was reading American notes, written by Charles Dickens. It contained his findings during his six-month trip to North America. In it, Charles Dickens had written about a deaf-blind girl called Laura Bridgman born fifty years before Helen Keller. Like Helen, she had also lost her ability to see and hear when she was two years old. Charles Dickens mentioned that she was successfully educated in the English language.
Reading this, Helen’s mother became hopeful. She immediately sent Helen and her father to visit an ear, nose, and Throat specialist. He referred Helen to Alexander Graham Bell, who, in turn, referred her to the Perkins Institute for the Blind. This is the same institute where Laura Bridgman had studied.
The Perkins Institute for the Blind sent an old student called Anne Sullivan to teach Helen Keller.
Her mentor
Like Helen Keller, Anne Sullivan had vision problems. When she was five years old, she had contracted an eye disease that left her mostly blind. After joining The Perkins institute for the blind, she underwent eye surgeries that significantly improved her vision. She learned sign language, which is used to communicate with deaf people, from Laura Bridgman and graduated when she was 20 years old. Soon after graduating, she was sent to teach Helen. The first word that Anne taught Helen was ‘doll.’ She gave a doll to Helen, which she took gladly. Then she spelled the letters ‘d,’ ‘o,’ ‘l,’ ‘l’ on Helen’s other hand. Helen learned the letters quickly and imitated Anne’s actions to spell the same word. This indicated to Anne that Helen was intelligent and can be taught.
Meeting her mentor
When Anne Sullivan first met Helen Keller, she was an unruly kid. She ran around the house breaking things and eating from others’ plates. Anne was astonished that none of Helen’s family members did anything to stop her behavior or teach her to behave properly. Anne noticed that her family’s sympathy only encouraged Helen to continue being unruly. She understood that she must discipline Helen without using force.Anne felt that the first step to teaching Helen was to teach her how to behave properly. So, with the permission of Helen’s family, Anne took custody of Helen for two weeks. During these two weeks, Anne was the only person Helen could depend on. Therefore, Helen couldn’t run to her parents when Anne tried to discipline her. During these two weeks, Helen learned to behave properly. In addition to that, Helen learned several words from Anne. She could spell them out on Anne’s hands. But she was just imitating what Anne was doing, just like a monkey. She thought it was a game. She did not understand that each of these words had meaning and referred to an object. Anne did not know how to make Helen understand that each of these was a word and had a purpose.
A picture of Helen and Anne in 1888 – By Family member of Thaxter P. Spencer, now part of the R.Stanton Avery Special Collections, at the New England Historic Genealogical Society. See Press Release [1] for more information. – New England Historic Genealogical Society, Public Domain, Link
The breakthrough
In her frustration, Anne took Helen to a water pump. She put one hand of Helen under flowing water, and on the other hand, she spelled out the letters ‘w,’ ‘a,’ ‘t,’ ‘e,’ ‘r.’ It was only then that Helen had the revelation that this flowing substance had a name, called water.
I knew then that ‘w-a-t-e-r’ meant the wonderful cool something that was flowing over my hand. That living word awakened my soul, gave it light, hope, joy, set it free.
This interaction between Anne and Helen is brilliantly portrayed in the film ‘The Miracle Worker.’
Formal education:
Helen’s formal education began in 1888 when she and Anne moved to the Perkins institute. In 1894, they moved to New York for her higher studies at the Horace Mann School for the deaf. In 1896, she got admission into ‘The Cambridge School for Young Ladies.’ In 1900, she started her Bachelor’s degree in ‘Radcliff College’ of ‘Harvard University.’ It was unthinkable at that time and age for a deaf and blind woman to achieve proper formal education through such reputed institutes. But Helen had a thirst for knowledge, and Anne helped her quench it. Mark Twain, who was impressed with Helen and her perseverance, introduced her to an oil magnate who later sponsored Helen’s education. In 1904, Helen graduated with a Bachelor of Arts degree from Radcliffe School. She was the first deaf-blind person to get this degree.
Helen was determined to converse with people conventionally. So, she slowly began reading lips with her hands and speaking small sentences. She used sign language very proficiently and became an expert in Braille, the writing system used for the visually impaired.
Helen spent the rest of her life, giving speeches and lectures on how she overcame the disabilities that crippled her and became an inspiration to deaf and blind people across the world. She shared, ‘The joy that life gave her’ in her speeches and motivated young women and men to live life to the fullest.
Optimism is the faith that leads to achievement. Nothing can be done without hope and confidence – Helen Keller (Source)
Personal life
Love affair
The biography of Helen Keller would be incomplete without mentioning her love life.
When she was in her mid-thirties, Helen had a secret love affair with a fingerspelling specialist sent to her home to be with her when Anne fell ill. She even tried to elope with him and got secretly engaged. The affair ended soon after when Helen moved in with her mother in Alabama after her father’s death.
Companions
In 1905, Anne married John Macy. Anne, John, and Helen moved to Forest Hills in New York along with the house help, Polly Thomson. Anne’s health began to deteriorate in 1915. So, Polly started taking care of Helen. Anne died in the year 1936 with Helen by her side. After Anne’s death, the household help Polly became Helen’s companion. They both traveled the world together and raised money to help blind people. Polly died in the year 1960, and Helen was left with a nurse who was originally hired to look after Polly. She remained with Helen until her death in the year 1968.
Work
Books and Lectures
Helen authored a total of 12 books and many articles. She toured 35 countries to raise awareness about causes she was passionate about. The Helen Keller foundation was founded in the year 1915 for research and charitable purposes.
Helen felt strongly about the causes she supported and was a staunch supporter of the working class. She traveled to many countries to motivate deaf and blind people and became a favorite of the masses.
The biography of Helen Keller
At the age of 22, Helen published ‘The Story of My Life,’ her autobiography with the help of Anne.
Bettering the life of blind people
Before Helen’s time, blind and deaf people were considered a burden for the family. They were treated harshly and sent to live in asylums, where the living conditions were terrible. Nobody thought that they could contribute anything to society. But Helen Keller changed all that.
She proved to the world that when provided with proper guidance and support, blind and deaf people can accomplish great things. This not only motivated blind and deaf people but also taught others to treat them better.
During Helen’s time, four systems were used to teach the visually impaired to read and write. This caused confusion and difficulty when blind people wanted to communicate with each other. Due to Helen’s continued efforts, in 1932, Braille was made the standard system to teach blind people. This made it easy for blind people to communicate with each other.
She traveled to different countries to help visually challenged people. Her visits created real improvements in the form of more Braille books, better educational opportunities, and job training for the blind. These improvements have helped blind people to integrate with society.
She also pushed the U.S. government to provide more assistance to the blind. Her fundraising campaigns for the American Foundation for the Blind continue to help blind people get proper education, work training, and live independently.
Contribution in other areas
Helen also supported birth control and was against military intervention. She joined the famous international labor union called ‘Industrial Workers of the World’. She wrote for them from 1916 to 1918, highlighting workers’ plights and the greed of their employers.
Political Ideology
Helen was a radical socialist who opposed Woodrow Wilson and favored leftist political ideologies. She was a member of the socialist party and spread awareness through her writings on the rights of women and the impacts of war. She met 13 U.S. presidents. Helen even wrote a series of essays on socialism called ‘Out of the dark.’
Death
In her last years, Helen was mostly confined to her home after suffering a series of strokes. She continued to raise awareness through The American Foundation for the Blind. Helen continued to raise funds for them too. On 1st June 1968, she passed away peacefully in her sleep at her home in Connecticut.
Honors and Memories
A hospital in Alabama, The Helen Keller Hospital, is dedicated to Helen. Alabama honored her by issuing a coin in Braille in her name. Helen Keller is also inducted in the National women’s hall of fame and Alabama Women’s hall of fame. She was one of the inaugural inductees in the Alabama Writer’s hall of fame as well. Various movies and T.V. series were made on Helen’s life and were loosely based on her autobiography. The Bollywood movie “Black” was based on her life.
Helen Keller and Mark Twain were good friends. They both were radical socialists. It was Twain who gave Anne Sullivan the name ‘Miracle Worker.’
Helen’s family got a whiff of her affair with her male secretary and forbade the two of them to marry because of her disabilities. Helen said that the first thing she would do if she could see would be to get married.
She introduced the U.S. to the dog breed ‘Akita,’ which was gifted to her when she toured Japan.
She won an Oscar for her documentary “Helen Keller in Her Story” (Source).
Helen was an excellent typist and could type very fast in both standard typewriter and Braille typewriter.
Due to her radical political views, the FBI tracked Helen’s relationships and activity for almost 30 years. (Source)
We hope that the biography of Helen Keller helped you understand Helen Keller’s struggles and how she overcame them. Due to her resolve and the desire to learn new things and help others, she is remembered even today. Whenever life gets difficult, read the biography of Helen Keller and always remember what she said:
Although the world is full of suffering, it is also full of the overcoming of it– Helen Keller
(Reference – Mullins-Cohen, Gina. “Showing Our Resolve.” Parks & Recreation, vol. 53, no. 1, National Recreation and Park Association, Jan. 2018, p. 10.)
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Sylvester Stallone is an actor, director, producer, and screenwriter whose carrier spans more than four decades. He has worked in the famous ‘Rocky’ and ‘Rambo’ film series. He also owns a boxing promotion company. Read the biography of Sylvester Stallone in this blog post.
Today, Sylvester Stallone’s name is known throughout the world. But he was not born famous. He struggled a lot in every stage of his life before he became famous.
Sylvester Stallone was born with physical deformities. He had a rough childhood because he was bullied heavily. In his 20s, he was so broke that he slept in a bus station for three weeks while searching for an acting job. He acted in quite a few mediocre and c-grade films before finally making a breakthrough with the “Rocky” series when he was 30 years old.
Understandably, all these incidents devastated Sylvester Stallone. But, despite these personal setbacks, Stallone never gave up. He still continues to make and write films on subjects that are close to his heart.
This biography of Sylvester Stallone highlights the important events in the life of this kind-hearted actor. It will take you through his early years, struggling days, and show you how he carved his name in history.
Birth
Sylvester Stallone was born on 6th July 1946 in Manhattan to an Italian father and an American mother. His parents named him Michael Sylvester Gardenzio Stallone. His younger brother is the noted actor and musician Frank Stallone. Stallone’s birth was a traumatic experience for the family as the doctor who delivered him damaged a nerve in the process. Consequently, the lower left side of Stallone’s face was paralyzed. This is the reason for his signature look and slightly slurred pronunciation.
Early years
Stallone’s father was a hairdresser and moved to Washington, D.C., in the 1950s to open a beauty school. His mother was a dancer who promoted women’s wrestling and opened a women’s gym in Washington in 1954. Stallone attended the prestigious Notre Dame Academy and Lincoln High School before he moved to study at the Charlotte Hall Military Academy and the University of Miami.
As a kid, Sylvester Stallone had weak bones due to vitamin D deficiency (Rickets). He was also heavily bullied. So, Stallone would often react dangerously. As a result, by the time he was 12, he had broken 11 bones and had been kicked out of 13 schools. When he was 15, he started bodybuilding because he was told that his brain was dormant.
During his college years, Stallone started taking up menial jobs and auditioned for brief supporting roles in acting. He was not getting any prominent roles and couldn’t pay his rent. So he was evicted from his apartment and had to sleep on a bus terminal. Therefore, in 1970, out of desperation, he acted in a soft-core pornography film for $200.
Sylvester Stallone later recounted this event as,
“It was either do that movie or rob someone because I was at the end – at the very end – of my rope” – Source
Stallone almost gives up acting
Stallone lived with his girlfriend, Sasha Czack, in New York. She was an aspiring actress who worked as a waitress to support both of them during their struggling days. Stallone also took up odd jobs like a zoo cleaner and an attendant in a theatre. Meanwhile, he kept on auditioning, even though he did not get any roles that made him feel content or happy. In 1972, Stallone almost gave up on acting due to the lack of good acting jobs. In the same year, he was rejected when he auditioned for the role of an Italian extra side actor for the iconic hit film ‘The Godfather.’ When Godfather went on to become one of the most massive hits of that year, he became terribly sad.For several years, his financial condition was terrible. At one point in time, he even sold his dog for $40 because he didn’t have any money to buy food.
At the time of this boxing match, Muhammad Ali was the champion who was at the peak of his career. He was paid $1.6 million for the match.
Chuck Wepner, on the other hand, was the underdog who waited years to fight Ali. He was paid just $100,000 for the match. Ali was the favorite, and so, ten times more people bet on Ali than on Wepner. Simply put, nobody expected the 35-year-old Wepner to win.
As expected, Ali won the match. But contrary to everyone’s expectations, Ali did not win easily. Indeed Wepner was only knocked out in the fifteenth round, moments before the final bell. Moreover, he even knocked down Ali once in the ninth round.
This is a pretty impressive feat even today, because, in his professional boxing career with 56 wins in 61 fights, Muhammad Ali had only been knocked down only four times. So, even though Wepner lost, he impressed a lot of boxing fans and the general public, including Sylvester Stallone.
The birth of Rocky
This gave Silvester Stallone an idea. So, when he came home after the boxing match, he sat down for three days to write the script for a movie. This movie would later become the blockbuster called Rocky.
He showed the script to many producers, but most of them were not interested in making the movie. But Stallone did not give up.
Once, Stallone was auditioning for a role. He did not get the role he auditioned for. But on his way out, he casually told the producers Irwin Winkler and Robert Chartoff that he had a story. When they read the script, they were very impressed by it. So, they offered him $25,000 for the script but wanted some well-known actor to act in it.
Stallone knew that if he did not act in the movie and the movie becomes a hit, he would kill himself. So, he was adamant about him playing the lead role in it. But the producers increased the offer gradually to $350,000, on the condition that Stallone does not act in the movie. Even though the offer was very tempting, Stallone did not budge. So, finally, the producers agreed to let Stallone act in the movie but reduced his salary to $23,000.
Worldwide fame with Rocky
The producers allocated a meager budget of $1 million for the film. Since the budget was very small, many relatives and friends of Stallone acted in the movie, and many scenes were shot only once. Even though it was made using a very small budget, Rocky went on to become a box office hit. It earned $225 million and received three Oscars.
Going on one more round, when you don’t think you can that’s what makes all the difference in your life – Sylvester Stallone
Riding high on the success of this film, Stallone made his directorial debut in 1978 and made the film ‘Paradise Alley.’ He then went on to direct and star in the sequel of Rocky in the year 1979. The film was a success as well.
Rocky III and Rocky IV came out in 1982 and 1985, respectively, and were box office blockbusters too. Rocky V, however, turned out to be a dud and marked an end to the franchise.
Declining popularity after Rambo
Stallone wrote and directed another popular and hit franchise in which he played the role of a Vietnam War veteran, John Rambo. All five films of the Rambo series became immensely popular. They gained favorable reviews from the masses and the critics alike. Stallone played the role of Rambo and Rocky in a total of 11 films and became quite popular in the USA as well as overseas. He starred in a few more popular films like Cliffhanger, The Specialist, Judge Dredd, Demolition Man, etc. but also had a few flops like ‘Oscar’ and ‘Stop! Or My Mom Will Shoot’. In the year 2000, Get Carter, a remake of a popular thriller film, was released starring Stallone. It was a commercial disaster, and Stallone’s popularity began to decline slowly. After some of the other films that followed also flopped, Stallone took a break of three years from making films.
Return to the film industry
In 2006, Stallone made the final installment in the hit series “Rocky” titled ‘Rocky Balboa,’ which went on to become a massive hit. He also released another movie of the “Rambo” franchise, which became a commercial success.
“I would like to be remembered by the character “Rocky” since it is my baby” – Sylvester Stallone
In 2010, the ‘Expendables’ was released, which gave Stallone the biggest opening day weekend of his career. It had an ensemble cast and featured many great action stars. A sequel to the film was released in the year 2012 and opened up to a warm reception. Expendables III was released in the year 2015 but never saw any commercial success.
Personal life
Despite having such a highly successful career, Stallone is also in the news regularly for his affairs and failed marriages. He has been married three times to date and had two broken engagements. The first marriage was with his live-in girlfriend, Sasha Czack, in 1974, when they were both trying to find some meaningful roles in Hollywood. The couple had two sons. Their first son, who was born in 1976, was named Sage Moonblood Stallone. He died in 2012 due to a heart attack. Their second son, Seargeoh, was born in 1979 and developed autism in his early years. The couple separated in 1985. In the same year, Stallone got married to a model and actress named Brigitte Nielson. But they separated soon after and had a very publicized breakup and divorce. He then had a brief engagement with model Janice Dickinson and Angie Everhart before he rekindled his relation with Jennifer Flavin, with whom he has three daughters. Stallone had broken his relationship with Flavin earlier when she gave birth to her daughter, who was not fathered by Stallone.
The biography of Silvester Stallone would be incomplete without mentioning the controversies surrounding him.
Controversies
In 2007, Sylvester Stallone was found guilty of possession of controlled drugs. In 2016, he was accused of sexual harassment by a 16-year old girl, which gathered a lot of negative publicity for the actor. But his ex-wife and friends came forward in his support. Another woman filed a complaint of sexual harassment against the actor in 2017, but the case was closed a year later.
Physically demanding roles take a toll on his body
Rocky and Rambo were both fight-filled franchises that demanded long action sequences from the lead actor. Stallone did not hire a body double in most stunts and performed all the fights himself. So, Stallone suffered some major injuries during the span of his career and had to spend four days in the ICU after a fight scene. He broke his neck while shooting for an action sequence for The Expendables. So, a metal plate has been inserted in his neck. One of his fingers was broken while shooting for the movie ‘Escape to Victory.’ Even after suffering so many setbacks in his personal and professional life, Stallone never gave up on his acting dream and achieved great heights of success after hitting rock bottom in his life.
Facts you probably didn’t know
After getting the money for Rocky, the first thing Stallone did was get his dog back. Knowing that Stallone was desperate, the person to whom he sold his dog to, charged $15,000 to resell it to him. The dog later appeared in the film ‘Rocky’.
Stallone was raised a catholic but denounced his faith when he started acting. He later started practicing his faith again when his daughter was born ill and is now a strict catholic.
Stallone is strictly against the use of guns and is a staunch advocate for gun control.
He owns a boxing production company called ‘Tiger Eye Productions,’ which has contracts with many known boxers.
This biography of Sylvester Stallone can motivate you
This biography of Sylvester Stallone can motivate you when you are in difficult times. The story of Sylvester Stallone is the story of an underdog. When he was a teenager, his mother feared that he would end up in prison. But he created an opportunity out of nowhere and changed his life around from being officially broke to gaining international stardom. So, when things turn ugly, and life appears meaningless, read this biography of Sylvester Stallone. More importantly, always remember what Rocky said.
“The world ain’t all sunshine and rainbows. It’s a very mean and nasty place. And I don’t care how tough you are, it will beat you to your knees and keep you there permanently, if you let it. You, me, or nobody is gonna hit as hard as life. But it ain’t about how hard you hit. It’s about how hard you can get hit and keep moving forward. How much you can take and keep moving forward. That’s how winning is done.”
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This blog post is a biography of Charlie Chaplin. Charlie Chaplin was an English comedian, writer, director, producer, and composer. He rose to fame because of his comic timing and on-screen persona that floored his audience. His career spanned 75 years. During this time, he got a lot of admiration from his fans.
‘The Tramp,’ the little man with a weird mustache, a bowler hat, and shoes, who used quirky movements and pantomime, was the central character in most of his films. This iconic character revolutionized the film industry like none other.
Even though Charlie became world-famous, he was not born with a silver spoon. He had a very rough childhood. As a child, he suffered from poverty and a lack of love.
“To truly laugh, you must be able to take your pain, and play with it.” – Charlie Chaplin (Source)
This article takes you into the world of Charlie Chaplin, who, with his perseverance, passion for acting, and the desire to succeed, earned a permanent place in global cinema and people’s hearts.
Birth
Charlie Chaplin was born in London on 16th April 1889 to Hannah Chaplin and Charles Chaplin Sr. His birth name was Charles Spencer Chaplin. He was the second son to his mother and first son to his father.
His parents, both music hall entertainers, separated when he was 2 years old. After that, his mother struggled financially to raise her two sons without any support from her husband.
Childhood in poverty
Charlie’s life trajectory can be called one of the most dramatic ‘Rags to Riches’ story. His early years were filled with difficulties at every step. At the age of 7, he was forced to earn money while studying at a school for paupers.
To add to his problems, his mother developed a psychological condition due to malnutrition. So, she was admitted to a mental asylum. Since their mother couldn’t take care of them, the two brothers were sent to live with their father.
Their father was a severe alcoholic who would often beat them. Even though they lived there for just two months, it was a horrible experience for them.
After they returned, their mother’s condition worsened day by day. So, young Charlie had to sleep hungry on many days when he could not earn anything.
“I was hardly aware of a crisis because we lived in a continual crisis; and, being a boy, I dismissed our troubles with gracious forgetfulness.” – Chaplin on his childhood (Source)
How Charlie got into acting
It is during this time that Charlie began performing on stage by chance. He became interested in stage performances to take his mind away from his unfortunate life and his mother’s condition.
Charlie’s mother encouraged him to keep performing on stage.
“She made me believe that I had some sort of talent,” Charlie said.
So, in between his school sessions and spending time with his mother, Charlie started to perform regularly.
He became a member of a clog-dancing troupe, which toured the halls of England to perform. He worked very hard to gain popularity among the masses.
Venturing into comedy:
Though Charlie was getting a lot of good work in musicals, he wanted to perform a comedy piece. His first comedy act was in the show “Jim,” directed by Harry Saintsbury. The show was not very successful, but Charlie was praised by many for his distinguished performance.
By this time, Charlie had abandoned his education and had become a full-time entertainer.
Charlie then acted in the “Sherlock Holmes” show in front of live audiences in nationwide tours.
A teenage Charlie in the play Sherlock Holmes – By Unknown author – Image is included in Chaplin: Stage by Stage by A J Marriot, p. 48, Public Domain, Link
He performed his role so brilliantly, that he was called to London to perform the same role alongside William Gillette, the original Holmes.
Sydney, Charlie’s half-brother, was also working full time in comedy sketches by this time. He helped Charlie in getting some prominent comedy roles.
Reviewers called Charlie “one of the greatest pantomime artists” they had ever seen!
After a series of successful comedy shows on stage, Charlie entered the movie industry in 1914 and signed a deal with Keystone Studio. He worked with several big film studios throughout his career.
Forming his own distribution company
Charlie always wanted to have full control and freedom over his films and their distribution. He was also concerned about the quality the big studios were lacking. So, he formed his own distribution company, United Artists, in partnership with three other artists.
First marriage
Before the company was founded, Charlie married an actress named Mildred Harris, who claimed she was pregnant with his child. So, they got married very quietly, and the pregnancy turned out to be fake.
Charlie had married Mildred only because he thought she was pregnant. When he found out she wasn’t actually pregnant, he became quite unhappy with the marriage. He actually became a father on 7th July 1919, but his son was born deformed and died three days later. Finally, Charlie ended the marriage in the year 1920, citing irreconcilable differences.
Deriving from this traumatic experience and his own childhood memories, Charlie started filming for ‘The Kid,’ in which he played the role of a foster-father of an abandoned young boy. The movie became a hit and was one of the first films that combined the nuances of comedy and drama.
There are many instances when the movie touches your heart.
For instance, to make money needed for survival, the boy breaks window glasses of strangers. Then, Charlie, who casually comes along, repairs these glasses and charges money for it. This scene makes you cry by displaying how cruel poverty can be. At the same time, it makes you laugh because of the comedy that comes along with it.
Several similar scenes throughout the movie make you laugh and cry at the same time.
“The picture I want to be remembered by”
After a string of successful films under his own banner, Charlie decided that his next film should be epic. He started writing ‘The Gold Rush,’ which was inspired by the Donner party. It was an elaborate film, and the production cost was about one million dollars at that time.
The Gold Rush was filmed for about 15 months. It went on to become one of the highest-grossing films of its time. At the time of its release, Charlie Chaplin said that “This is the film I want to be remembered by.”
While shooting for this film, Charlie married for the second time under similar circumstances of his first marriage. Lita Grey, a 16-year old actress, became pregnant with Charlie’s child. So, Charlie married her discretely to avoid being charged with statutory rape.
It turned out to be an unhappy marriage too. Charlie had two sons with Lita before she left him. The bitter divorce that followed saw one of the highest cash settlements in the history of American courts. Charlie was deeply affected by the charges pressed on him by his wife.
While dealing with the divorce, Charlie was filming for ‘The Circus.’ He called the film a reminder of his troubled times. So, he even omitted this film from his autobiography. This shows how deeply Charlie was affected by the charges pressed on him by his wife.
“I always like walking in the rain, so no one can see me crying.” – Charlie Chaplin (Source)
After ‘The Circus’ was released, the film industry saw the introduction of sound in movies. Charlie found the new technology absurd. He felt that the soundtrack can affect the art of acting. So, he continued working on silent films.
‘City Lights,’ the new movie he was working on, was based on a man who falls in love with a blind girl and raises money for her operation. It revolved around ‘Tramp,’ who was the central character of all his films. Charlie later confessed that he drove himself to a neurotic state to achieve perfection for this film.
City Lights reached new heights of financial success and gathered rave reviews from critics and audiences alike. It became one of the personal favorites of Charlie and remained so throughout his career.
This biography of Charlie Chaplin would be incomplete if it only mentioned his achievements and does not explain how his popularity faded in the USA.
Fading Popularity
The 1940s were a rough decade for Charlie. His life was marred by professional and personal controversies as comparisons were drawn between him and Adolf Hitler. Charlie Chaplin and Adolf Hitler were born four days apart, had both risen from poverty to world fame, and had the same style of mustache.
These comparisons made him write ‘The Great Dictator,’ which made fun of Hitler and his ideals. It was a great risk, but Charlie could take it because he was an independent director. After two years of writing the script and one year of production, the film became one of the highest-grossing films of that era. The movie received five academy award nominations.
Political ideology reduces public support in the USA
In the 1940s, Charlie started voicing his political opinions in his films. In ‘Monsieur Verdoux’ he condemned the Capitalists for encouraging war by selling weapons of mass destruction. Even though the film was a hit elsewhere, in the USA, it failed terribly.
During World War 2, he also advocated the idea of a US-Soviet partnership. So, his image in the USA was tarnished, blaming him for being a communist. Charlie, however, denied being a communist.
A paternity suit
In 1943, Charlie was slapped with a paternity suit after he refused to acknowledge the pregnancy of a budding actress named Joan Barry. Many charges were slapped against Charlie by the FBI, who wanted to damage Charlie’s image after learning about his political ideologies. What followed was a bitter court battle. In 1944, Charlie was declared to be the child’s father and was ordered to pay child support to the mother till the age of 21.
Just two weeks after the suit was filed, news came in that Charlie had secretly married his trainee, Oona O’Neil. This worsened Charlie’s image.
Oona O’Neil was Charlie’s fourth wife and remained with him until his death. They had 8 children together. Charlie described this marriage as the happiest years of his life.
The biography of Charlie Chaplin
His next film was an autobiographical film called ‘Limelight.’ Many of his family members worked in this film. Since the theme was set in London, Charlie decided to hold the premiere of this film there. So he left Los Angeles. But once he left the USA, his permit to re-enter the USA was revoked due to his political and moral behavior.
After being banned from the USA, Charlie Chaplin and his family settled in Switzerland. He spent the rest of his life there. Even though he did take some films, he spent most of the last two decades of his life preparing his old movies for re-release.
Awards and final works
This biography of Charlie Chaplin would be incomplete without mentioning the awards that Charlie Chaplin received. Charlie received the International Peace Prize in 1953 for his contribution to global peace and friendship among nations. However, this marred his image further in the USA as the award was given by a communist-led council.
In 1972, he received an honorary Oscar for his contribution to the film industry. It was seen as the USA welcoming back the artist after the country’s political scenario changed. It was a heartfelt moment as Charlie accepted the award after a 12-minute standing ovation.
Death
Charlie suffered a minor stroke in the 1960s and was confined to a wheelchair by the mid-1970s.
In October 1977, Charlie suffered a stroke in his sleep and died at the age of 88 years.
Peace did not come to him even after his death. His coffin was stolen from the cemetery by two immigrants who held the body for ransom to extort money from Charlie’s wife. The thieves were caught, and Charlie’s body was re-buried in the same cemetery from which it was stolen.
Charlie’s Legacy
Charlie Chaplin was one of the most influential artists of the 20th century. He was considered one of the pioneers of silent films of that era. His film-making techniques were close to perfection. He left no stone unturned in giving the best experience to his audience. Many future comedians were so inspired by him that they began to incorporate his mime sequences in their own styles.
Now his legacy is maintained by his children at the Chaplin office in Paris. His statue as “The Tramp” is situated in Leicester Square. A Soviet astronomer who discovered a minor planet even named the planet after him.
Facts you probably didn’t know
Charlie was a perfectionist who often bordered on neurotic disorders according to his own words. In the movie City Lights, he had the actress retake a shot 342 times just for saying the two words “flower, sir.”
There is an annual Charlie Chaplin Comedy Festival held in a small town in Ireland every year. People come dressed as Charlie Chaplin at the festival. There is a bronze statue of Charlie in the town as well.
His former home in Switzerland has been converted into a museum. People from around the world gather here to get a glimpse of the artist’s life up close in his own home.
Charlie had 11 children from four marriages and received three academy awards in addition to several other honors.
We hope this biography of Charlie Chaplin helped you learn about Charlie Chaplin, his struggles and his achievements.
Whenever you think your life gets out of hand, read this biography of Charlie Chaplin. Even though he had no money and no proper family as a kid, Charlie discovered his passion. Despite all the struggles he had to undergo in life, he kept pursuing it and succeeded even when the odds were stacked against him. So, whenever you are too stressed or too depressed and can’t find a reason to smile, read this biography of Charlie Chaplin and remember what Charlie said:
A day without laughter is a day wasted – Charlie Chaplin
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As you may already know, currencies are monitored and controlled by a central institution (the government). A country’s government can control the currency’s exchange rate, the amount of currency available in circulation, etc.
By determining the interest rates, governments and banks control the flow of money as well. In addition to that, banks and other financial institutions charge high transaction fees. Thus, in reality, people aren’t in control of their money, even though they work hard to earn it.
The cryptocurrency was invented during the global recession of 2008 to help people take control of their money by putting an end to the traditional monetary system.
A cryptocurrency is a decentralized digital currency, that eliminates the need for a middle man. It is a currency that does not exist physically, but only digitally. Since it is decentralized (distributed), no single authority can control it.
But since no single credible authority controls or monitors it, anybody can manipulate it. Traditional currencies are tracked, monitored, and controlled by governments and banks. If not for banks, you could add additional zeros to your bank account, or lie that your company hasn’t deposited your salary. But you cannot do this because banks keep track of your money and all your transactions.
But, in case of a decentralized digital currency, nobody monitors it, or tracks the transactions. So, anyone, say Mr.A, can claim that he had transferred 100 units of cryptocurrency to Mr.B. He can create a false transaction to prove this. In the worst-case scenario, Mr.B must pay the 100 units of cryptocurrency to Mr.A.
Thus, the lack of an authority to monitor transactions and detect frauds is one of the most significant problems of digital currencies. However, the first successful cryptocurrency, Bitcoin, solved this problem using Blockchain technology.
Blockchain
To understand what Blockchain is, let’s consider a simple example. Let’s imagine that you are a student in an examination hall. Your teacher distributes question papers to everyone, including you. Let’s assume everyone gets the same question paper.
If you don’t know the answer to a question, you cannot replace it with a question that you know the answer to. If you do so, your teacher can easily find out that you have tampered with the question paper. Since the question papers are copies of each other, all he/she needs to do is compare your question paper with that of another student.
Blockchain uses a similar technique for fraud detection. Blockchain is a technology that maintains a record of financial events (transactions, contracts, etc.) across several computers in a network. The transactions are stored in Blocks.
Blocks are linked to each other to form a Blockchain. As new transactions happen, more blocks are added to the existing Blockchain. A copy of the Blockchain is sent to everyone in the network whenever a Blockchain is updated. Since copies of the Blockchain exist in several computers, other computers will notice if someone tampers with a transaction in any block in the Blockchain.
Private and public keys
When you create a Blockchain wallet (similar to your bank account), you receive a public key and a private key. The private key gives you access to your account (to spend money), whereas the public key confirms the ownership of your account. The private key is kept secret, whereas the public key is shared with others.
When you initiate a transaction, three things are shared with the entire bitcoin network.
Your message (transaction).
Your digital signature, which is created by passing your message through a Hashing algorithm and then signing it using your private key.
Your public key.
If you go to a bank and deposit a check, the bank employee first makes sure that the account details are correct. Then he/she checks the authenticity of the check by verifying the signature. Finally, if everything matches and the said account has the required amount of money, you get the money.
In this bitcoin scenario as well, there are people who perform the job of the bank employees. They are called Miners.
Hashing algorithm
The Hashing algorithm plays a very important role in the Blockchain mechanism. It makes sure that nobody can hack your account using the message you send.
To understand what a hashing algorithm does, let’s consider an example. Assume you want to encode the text, “The Moon is black,” and send it to your friend. Let’s use numbers for each letter of the alphabet (a=01, b=02, z=26, and ‘ ‘=’/’).
So, the message will be encoded as:
The Moon is black = 200805/13151514/0919/0212010311
You can now write it on a piece of paper and send it to your friend. If he knows the encoding algorithm, he can reconstruct the original message easily. However, others won’t be able to decode the message because they don’t know how you encoded it.
The Hashing algorithm serves a similar purpose in the Blockchain mechanism. However, unlike our algorithm above, it is much more complex, with the following properties:
Regardless of the input’s length, its output always has the same length (256 bits = 64 hexadecimal digits).
Its input cannot be reconstructed using its output.
The same input will generate the same output, but no two inputs will generate the same output.
As you can see in point 2, it’s impossible to obtain the input from the output (hash). So, the only way to break the algorithm or get the input from the output is by Brute-Force, i.e., hash different inputs until you find the input that created that output. Since the number of bits in the hash is 256, this would take 2^128 tries on an average. A supercomputer that tries 15 trillion entries per second would take 47,956 trillion years to find the input.
If you’re interested, you can try to hash different texts using the hash calculator here.
Miners
We saw that Miners are similar to bank employees. The bank employee is hired and paid by the bank to do the job. Bitcoin miners, on the other hand, are not hired by anyone. They are users who volunteer for the job of verifying the messages (transactions) and get a reward for it. When a miner wants to verify the transactions, he selects a list of unchecked transactions. Then he starts verifying the transactions one after the other.
How does a miner check a transaction?
Whenever you make a transaction, your transaction details, digital signature, and public key are automatically shared with the entire bitcoin network.
Any Miner can take these details to check your transaction to ensure that you are the one who initiated the transaction. To do this, the message you sent is processed by a hashing algorithm. At the same time, your digital signature and public key are processed through a verification algorithm.
The hashes resulting from both these processes are compared. If they are the same, the message you sent and the message received by the miner are the same. If not, it indicates that someone has tampered with your message, and the miner rejects the transaction.
Then, the miner verifies that you have sufficient bitcoins to make the transaction. In the same way, he verifies as many transactions that can fit into a block.
But you should remember that the transactions are sent to the entire bitcoin network. Hence, several miners can start verifying these transactions simultaneously.
Even though many miners compete for the job, only one of them can be paid. But, since many miners may finish checking the transactions simultaneously, rewarding only one of them is difficult. So, they are assigned a very difficult puzzle to solve. The first one, to solve the puzzle in addition to checking the transactions, gets paid.
The puzzle
Each block is provided a target hash value (64 hexadecimal numbers). The Blocks contents, including the checked transactions and the hash value from the previous block, are hashed along with a random number (Nonce) to get a hash value. To solve the puzzle, the miner has to find a Nonce (between 0 and 2^31), so that the resulting hash value is less than or equal to the target hash value.
The reward
When a miner finds such a nonce, several things happen:
A new block is added, and the Blockchain is updated.
The verified transactions are removed from the available pool of transactions to verify.
The miner gets a reward for his work.
In 2016, the reward for a miner was 12.5 bitcoins. In addition to that, the miner also collects the transaction fees for the transactions he verified. Besides being a rewarding experience for miners, mining is the only way in which new bitcoins are introduced into the bitcoin network.
The reward for mining is halved every four years. In 2020, it is expected to become 6.25 bitcoins. The maximum number of bitcoins that can be created is 21 million. In 2040, the number of bitcoins will equal this amount, and the miners will get no bitcoins for mining, but only the transaction fees for verification.
Fraud detection
As you can see above, every block’s hash value changes depending on the hash value of the previous block as well as the transactions in that block. So, if someone changes a transaction in a block, the hash value of that block changes. Consequently, the hash values of all the subsequent blocks in the Blockchain change too. So, any attempts of fraudulence can be uncovered by comparing it with the blockchains stored in the network.
You can test this by changing the values in any peer in this link. The color of the corresponding block and all the subsequent blocks in that peer changes to red, whereas the Blockchain in other peers remain green. Each peer simulates a Blockchain user in the network.
Should you get into bitcoin mining?
The reward for bitcoin mining can be tempting (1 Bitcoin = $9,342 at the time of writing this article). However, the resources, processing power and electricity, needed for mining bitcoins successfully are costly. When bitcoin was introduced in 2009, the complexity of mining was very less, and the reward was high (50 bitcoins).
However, the rewards are halved every four years. Moreover, the complexity of the mining algorithm is adjusted depending on the number of miners. So, the complexity of mining increases with the increasing number of miners, which leads to increased processing power (and costs).
If you are entering the mining business now, you stand no chance against mining pools. A Mining pool is a large number of miners working together. If one of them mines a bitcoin, the profit is split among everyone.
There are several other cryptocurrencies out there. But the one that has the most market capital after Bitcoin is Ethereum, which was invented in 2015.
While the concept of Blockchain and mining are similar to Bitcoin, the use and the currency of Ethereum differ. Bitcoin’s use is to serve as a decentralized digital currency to monitor financial transactions. Ethereum, in contrast, serves as a digital currency to monitor smart contracts.
The digital currency of Ethereum is Ether. Unlike Bitcoin, however, there is no limit to the amount of Ether that can be mined. 18 million Ether are mined every year. This may lead to inflation, reducing the value of Ether eventually, when the supply of Ether overtakes its demand. However, due to the increase in demand as well as the complexity of mining over time, inflation may be slowed or even halted.
Smart contracts
In Bitcoin, a transaction in a block may look like:
Tom sends 100 BTC to Harry.
In Ethereum, a smart contract in a block may look like:
Send 100 ETH from Tom to Harry if Tom’s balance is more than 150 ETH and the date is 11.06.2020.
Smart contracts are digital contracts and can be programmed in a special language called Solidity. Unlike Bitcoin, which requires manual transactions, in Ethereum, smart contracts can automatically trigger transactions. Smart contracts are Dapps or Decentralized applications. Smart contracts can be used for a variety of purposes, not just financial transactions.
What should you know before you get into cryptocurrency trading?
Cryptocurrency trading is similar to forex trading in some ways. So, many pieces of advice that apply to forex trading apply to cryptocurrency trading as well.
Cryptocurrencies are volatile
The prices of cryptocurrencies can vary greatly within a day. So, investing in cryptocurrency trading can be risky if you are new to it.
Leverage
Just like in forex trading, the concept of leverage exists in cryptocurrency trading as well. It can lead to quick profits as well as quick losses.
What moves the prices
Several forces including supply & demand, integration into eCommerce, security breaches, press coverage, etc. can affect the price of cryptocurrencies easily.
Uncertain future
Despite cryptocurrencies being a marvel of this century, their future is uncertain. Just like the digital currencies before them, they may go extent in the future.
Compare fees
Always compare the fees of different cryptocurrency brokers, before you choose one for trading.
Pips
A Pip in cryptocurrency trading means the same as the pip in forex trading. However, the value of 1 Pip varies from one cryptocurrency to another.
Forex, which stands for Foreign Exchange, is the market for trading currencies. Currencies are not traded in an exchange. They are traded Over The Counter (OTC). So, they are traded 24 hours a day, 5 days a week.
How does Forex trading work?
Let’s say you are in Germany. You want to trade Euro against US dollars. The exchange rate is 1.5, i.e., €1 = $1.5. You exchange €1000 and get $1500. Now you hold the money in US dollars till the exchange rate goes down.
After a few days, the exchange rate goes down to 1.3. Now you exchange the US dollars back into Euros. So, you would get $1500/1.3 = $1154. Thus, you have made a profit of $154. This is how forex works.
Even though this sounds simple, choosing the right currency pair and the right time to trade is not easy. Depending on the economic and political conditions in each country, the value of its currency can rise or fall. The demand and supply for a currency can also affect its price in the forex.
Terms used in forex:
Currency Pair
The two currencies which are coupled for trading in forex form a Currency Pair. In the above example, we used the currency pair of Euro and Dollar. Similarly, other currency pairs can also be used. The six most commonly traded currencies in the forex are:
The US Dollar
The Euro
The Yen
The British Pound
The Canadian Dollar
The Swiss Franc
Lots
In forex, currencies are traded in lots.
1 micro lot = 1,000 units of the base currency (E.g., $1,000 or €1,000)
1 mini lot = 10,000 units of the base currency
1 standard lot = 100,000 units of the base currency
Pip
The smallest unit of movement of an exchange rate is called a Percentage in point (Pip). Generally, 1 Pip = 1/100th of a percentage = 0.0001. In Currency pairs, where the Japanese Yen is involved, 1 Pip = 1 percentage = 0.01.
Let’s understand what Pips are, with an example. Consider an investor who wants to trade 100,000 Euros.
Case 1:
Euro – US Dollar
Let’s say the Euro is trading against the Dollar at a rate of 1.5. When the trader exchanges €100,000, he will get $150,000. After a few days, it is trading at 1.499. If he exchanges it back, he will get, 150,000/1.49 = €100,671. So, a profit of (1.5 – 1.49)/0.0001 = 100 Pips generates a profit of €671. If you were trading the other way round, i.e., US Dollar – Euro, you would have made a loss of 100 pips.
Euro – Japanese Yen(¥)
Let’s say the Euro is trading against the Yen at a rate of 100. When the trader exchanges €100,000, he will get ¥10,000,000. After a few days, it is trading at 99. If he exchanges it back, he will get, 10,000,000/99 = €101,010. So, a profit of (100 – 99)/0.01 = 100 Pips generates a profit of €1,010.
Simply put, your returns depend on the change in the number of pips and the amount you are trading.
Leverage
In finance, leverage refers to the concept of buying assets using borrowed money. Many forex trading companies can offer their traders leverages. It enables you to reap higher returns when you make profits.
Leverages are normally expressed in ratios. If a forex trading company offers you a leverage of 10:1, and you use $1,000 for a trade, it is similar to using 1000 x 10 = $10,000. If you made a profit of 5% without leverage, it translates to 5% of $1,000 = $50. But, if you use a leverage of 10:1, your profit will be 10 x (5% of $1,000) = $500. However, the opposite is also true. A loss of 5% will mean that you lose $500, i.e., half of your investment.
What should you know before investing in forex:
Even though investing in forex to get rich quick can be tempting, it comes with great risks.
Lack of information
Unlike stocks which are traded publicly, currencies are traded over the counter. This leads to a lack of transparency. Therefore, big institutions that participate in the forex trade could have access to information that you lack. This could hurt your chances of success.
Time
Unlike experts, who know when to buy and when to sell the currencies, as a beginner, you may not know those tricks. For example, You may hold on to a losing currency, hoping that it will bounce back. If it doesn’t bounce back, you will end up losing more of your money.
Too much leverage
Too much leverage can amplify your losses. As a result, you may end up losing more money than your initial investment.
What should you look for in a forex broker?
Authenticity
Is the brokerage firm a legit one? How long has it been in existence? Do they enable you to transfer funds without any problem?
Costs
What are the transmission costs? Is there any minimum deposit requirement?
Currency pairs
How many currency pairs do they offer for trading, and what are they?
Leverage
If you really want to make huge profits, and want to use the leverage option, how high is the leverage offered?
Educational materials
What educational materials do they offer to help you learn forex trading? Is there a mock account to help you practice?
Software
Forex trading can be very volatile. Any delay, between the moment you click on ‘Buy’ and the moment the actual purchase is made, can cost you money. So, make sure that the software functions without any glitches, lags, and bugs.
Regardless of who you are and how old you are, investing today can make your tomorrow safer. While investing can be fruitful, choosing the right investment strategy is important too.
Depending on the investment strategy, a prince can become a pauper, and a pauper can become a prince. So, make sure you choose your investment strategy wisely.
“Rule No. 1: Never lose money. Rule No. 2: Never forget rule No.1” – Warren Buffett (Source)
This blog post will help you understand the different ways in which you can invest your hard-earned money. Depending on your country of residence, one or more of these investment options may not be available to you. So, try to find out which of these options are available in your country.
1. Stocks
A stock is a small unit of ownership of a company.
When you purchase a stock of a company, you buy a small piece of the company. This gives you a small fraction of ownership of that company.
By purchasing a stock of the company, you can gain two advantages:
When the company makes profits, the value of your stock goes up. You can then sell it to make a profit.
When the company makes excess earnings, it can pay you a part of its profits. These are called dividends.
Investing in stocks can be extremely risky. This is especially true when starting out.
How are stocks traded?
Stocks can be traded in an exchange or over the counter. Let’s see how they differ from each other.
Trading time
An exchange is a physical location. So, trading in an exchange happens only five days a week when the exchange is open.
In OTC trading, assets are purchased and sold between two parties (dealers and institutions), without the supervision of an exchange. Unlike in an exchange, trading is not done at a physical location. Trading is usually done over the phone, emails, or computer networks. So, OTC trading is done 24 hours a day, five days a week.
Transparency
Trading over an exchange is more transparent and subject to more regulations. Therefore the prices of the commodities you buy or sell in an exchange are openly known to everyone.
Trading over the counter is not so transparent. When commodities are bought or sold over the counter, the price of the transaction may not be known until the transaction is completed.
Assets
Stocks of big companies are traded in an exchange. Stocks of small companies and other assets, which cannot afford the fees and regulations of the exchange are traded Over The Counter.
Price
In exchange, the prices are determined by demand and supply of commodities. However, in OTC trading, prices are set by the dealers.
What should you know before getting into the stock market?
How much should you invest?
Investing in the stock market is a risky ordeal. There is a chance that you might lose all the money you invest. So, invest only the amount of money that you can afford to lose. As you gain experience, you can invest more.
How long should you keep a stock?
It might be tempting to invest in the stock market to become rich quickly. However, in the stock market, there are very few overnight millionaires.
Most successful people in the stock market are there for the long run. They investigate the company properly before investing in it. Once they invest in it, they hold the stock for months or years, sometimes even for decades, before selling it. You can also opt for a similar strategy.
How to choose the right stock to invest in?
Measuring volatility – The volatility of a stock indicates how much it fluctuates with the market. For example, let’s calculate the volatility of Facebook’s stock. Go to Yahoo Finance. Type Facebook in the search bar, and click on Summary. The variable called Beta indicates the volatility of Facebook’s stock.
A value of 1 is the average. Any value below 1 shows that the stock is stable. The stock’s price doesn’t fall ridiculously if the market comes crashing down. On the other hand, its price doesn’t soar to the sky if the market goes roaring up. Any value more than 1 indicates that the stock is volatile, and varies heavily with the market.
If you want to minimize your risks, you should go for a company whose Beta value is less than 1.
Measuring profitability
EPS (Earnings per Share) is a company’s profit divided by its total number of shares. This is the amount of profit you would get if you own one share of that company.
EPS is a measure of how profitable a company is. If a company is profitable, its EPS should grow steadily every year. In addition to that, its EPS should be higher than its competitors in the same category. So, to find a profitable company, compare its EPS to its past and with its competitors.
You can find the historical data (Revenue, Profit, EPS, etc.) from Yahoo Finance by clicking on the ‘Financials’ tab and then on the ‘Income statement.’ Data from the last four years are displayed free of cost.
How expensive is a stock?
You can use PE Ratio (Price to Earnings Ratio) to find out how costly a company’s stock is. It tells you how much you should pay to get a profit of $1.
The PE Ratio is the company’s stock price divided by its EPS. A higher PE Ratio could indicate that the company’s stock is overpriced, but its profits aren’t that huge.
A smaller PE Ratio could suggest that the company’s profits are higher, even though its stock is cheap. However, it could also mean that very few people invest in the company because they are wary of its performance. This could be an indication that the company’s profits are going to take a nosedive.
So, while a low PE Ratio means that the stock is cheap, it doesn’t necessarily mean you have to buy it. Compare the PE Ratio with other companies in the same category and also with the category average.
Before you buy a stock, find out why it is cheap. Gather more information about the company and the current market. Read about the companies’ future plans and products, the skills of the CEO, etc.
Estimating ROI
The inverse of PE Ratio gives you the ROI of a stock. You can use it to compare the ROI of the stock with other investment models like bonds, etc.
When should you buy a stock?
Identifying the trend – Before investing in a company’s stock, find out if it is following a bullish or bearish pattern. A bullish pattern implies that the stock’s prices have been rising steadily. It is an indicator that you can profit by investing in that stock. A bearish pattern indicates the opposite. This information is listed in Yahoo Finance, in the Summary tab, under the company’s chart.
How can you buy a stock?
Through the most part of the Twentieth century, people had to go to the stock market and wait for hours to buy a stock.
Nowadays, you can open an account with an online stockbroker and start trading immediately. So, choosing the right online stockbroker is very important. Figuring out the following details about a stockbroker can help you make an informed decision.
Opening an account
Does the stockbroker charge you money for opening an account? If the account is free of cost, do they offer access to a trading platform?
Minimum deposit
How much money should you deposit to open an account?
Maintenance fees
Is there a monthly or annual fee for maintaining your account?
Commissions
How high are the commissions? Do you have to pay a commission every time you buy or sell a stock? If so, how does it change depending on how often you trade? Does it increase when you trade often, or does it increase when you trade rarely?
Other investment options
Does the stockbroker offer additional investment options, like mutual funds, etc.?
Tools to learn
Does the stockbroker offer enough educational tools to help you learn? Can you open a demo account and learn to trade before actually jumping into the stock market? Are there professionals who can guide you when you are in need?
Security
How is your account protected against fraud? How is your money insured if the company offering stock brokerage goes broke?
These are the basics you need to know before buying stocks. If you want to invest in the stock market, consider reading more about it.
Scores
Savings ROI Ease of Accessibility Risk
NAVery High ( > Term deposit account)High Very High
Savings – NAROI – Very High ( > Term deposit account)Ease of Accessibility – High Risk – Very High
2. Bonds
Let’s understand what Bonds are, with the help of an example.
Let’s assume that you are in sudden need of money. If the amount you need is $100, you can ask a friend to lend it to you. However, if you need $2,000, a single friend may not be able to give it to you. So, in this case, you can ask 20 friends to lend you $100 each.
After a year, when you have enough money, you decide to return the money to your friends. But you don’t return them just the $100 you borrowed. Instead, you add $5 to the amount and give each of them $105 as a way of thanking them for helping you when you needed them the most.
Similarly, governments need money to build roads, construct schools, and other public welfare projects. Likewise, large companies need enormous funds to expand their businesses.
Banks may not be able to provide such huge amounts of money to these organizations. Or, they might charge high interests.
On such occasions, these organizations borrow fixed denominations of money (say $1000) from multiple people (investors). To each of these investors, they pay a fixed interest every year and return the borrowed amount after a fixed amount of time.
To do this, they issue bonds and sell them. When you purchase a bond, the company issuing the bond promises to pay you interests at regular intervals until the maturity period expires. Once the maturity period expires, it repays you the borrowed amount. The bond agreement lists the terms of borrowing, including the amount borrowed, the promised interest rate, and the period, after which the entire money should be returned.
Bonds can be purchased or sold, and are traded publicly, like stocks.
Hold the bond until the maturity period expires. In this case, you receive regular interest payments until the maturity period expires. Once the maturity period expires, you get the original principal that was borrowed from you.
If the price of the bond increases, sell it, and make a profit.
Even though bonds are traded like stocks, they are not as risky as stocks. This is because stocks are small pieces of the company. So, their price depends directly on the performance of the company.
Bonds, on the other hand, are loans lent by you to the company. Their price doesn’t directly depend on the performance of the company.
How do bonds work?
Bonds are a bit complex to understand. So, we will explain this with the help of an example.
Let’s assume that a company XYZ issues bonds to generate funds to build a new branch in Australia. Each bond is worth $1000. This is called the Face Value of the Bond.
XYZ promises to repay the Face value in 20 years. This is the maturity period or the lifetime of the bond.
XYZ promises to pay yearly interests at a rate of 5% of the face value. This amounts to $50 p.a. This is called Coupon, and the rate is called the Coupon Rate. This is fixed for the lifetime of the bond. The Coupon rate offered by companies is generally the same or higher than the market interest rates when issuing the bond.
Case 1:
In the next year, let’s assume that the market rates drop to 3%. Now, new bonds cost $1000 but pay only $30 (3% of $1000) yearly as Coupon. Even the company that issued the bond to you last year is issuing new bonds, but only at a reduced rate (3%). So, the bond you purchased last year becomes attractive to other investors because it offers $50 yearly payments.
Now, people are willing to pay more to buy that bond from you. Hence, the price of your bond increases in the bond market. It can only increase up to a value of $1667, at which point, a 3% interest rate would pay $50 annually. If it increases beyond this value, no one will purchase it. Now, your bond is said to be trading at a premium because it is costlier than the Face Value.
Now, you have two choices:
If you are a bond investor, you can keep the bond. In this case, the Coupon rate doesn’t change for you. You will receive the same Coupon of $50/ year (5% of $1000) for another nineteen years. The Coupon payments you get during this time will add up to $50 x 19 = $950.
If you are a bond trader, you can immediately sell the bond and make a profit of $1667 – $1000 = $667.
Case 2:
In the next year, let’s assume that the market rates increase to 7%. Now, new bonds cost $1000 but pay $70 (7% of $1000) yearly as Coupon. Even the company that issued the bond to you last year is issuing new bonds, but only at an increased rate (7%). So, the bond you purchased last year becomes unattractive to other investors because it brings only $50 as yearly payments.
Now, people are not willing to buy that bond from you. So, if you want to sell it, you can only sell it at a lower price. Hence, the price of your bond decreases in the bond market. However, it can only decrease up to a value of $714, at which point, a 7% interest rate would pay $50 annually. If it decreases beyond this value, everyone will want to purchase it, but you will face higher losses. Now, your bond is said to be trading at a discount because it is cheaper than the Face Value.
Now, you have two choices:
If you are a bond investor, you can keep the bond. In this case, the Coupon rate doesn’t change for you. You will receive the same Coupon of $50/ year (5% of $1000) for another nineteen years. The Coupon payments you get during this time will add up to $50 x 19 = $950.
If you are a bond trader, you can immediately sell the bond and suffer a loss of $1000 – $714 = $286. You can then add another $286 to it and buy a new bond for $1000 at a 7% Coupon rate. Then the sum of Coupon payments you get over 19 years would add up to $70 x 19 = $1330.
Case 3:
The market rates remain the same next year as well. Then, the bond is said to be trading at par. You can either keep the bond or sell it, even though selling it wouldn’t give you an advantage.
What should you look for in a bond?
Default risk
This is the most important factor. Before purchasing a company’s bond, find out if the company can repay the bond. Sometimes, companies might list a physical asset as a mortgage for the loan. In some countries, bond ratings, issued by trusted institutions, can gauge a bond’s credibility.
If neither a mortgage nor a bond rating is available, find out if the company’s income is more than its debts. If not, stay away from the company’s bond.
While highly credible bonds are safer, less credible bonds pay higher interests. Thus, investors willing to take higher risks can get higher ROI by investing in these bonds.
Interest rate risk
If you plan to hold a bond till maturity date, you don’t have to worry about future interest rates. But if you purchase a bond with the sole aim of selling it at a higher price, there is a risk that the interest rates might go up in the future due to inflation. In turn, the price of the bond will go down, and you might be stuck with a bond that you cannot sell.
Alternatively, if the interest rates go down in the future, the price of your bond will go up. In such a case, you can profit by selling your bond.
Liquidity Risk
Based on the type of bond you purchased, selling it in a bond market can become difficult. Consequently, you might end up holding it till the maturity date. So, either buy a bond that you are willing to hold till maturity or a bond that you can sell without fail.
Call risk
There is a type of bond called a Callable bond. A Callable bond gives the issuer the option of paying off the debt before the maturity date while offering a higher interest rate. When the interests go down, the company can buy the Callable Bond back from you at face value. It can then issue it at a lower interest rate.
So, by purchasing a Callable bond, you can benefit from the higher interest rates. However, if the prices go up in the future, you will not be able to profit from it.
How much should you pay for a bond?
Once you find a Bond with a good Coupon rate, you might want to buy it as soon as possible. But, in your haste, don’t end up paying too much for an actually cheaper bond. Do due research to find out what price the bond was sold at recently, and what interest rate was offered.
Maturity period
When it comes to bonds, the maturity period is an important factor. Interest rates in the bond market generally don’t vary rapidly as in a stock market. In short-term bonds, which mature within four years, the risk of the interest rates going up, and the price of the bond declining is low.
However, in bonds with long maturity periods, this risk is higher. Hence, to compensate for this risk, bonds with longer maturity periods (10+ years) offer higher coupon rates.
So, depending on your strategy (investing or trading), you have to choose the maturity period wisely.
How to buy a bond?
There are several ways to buy a bond.
1. Buying directly from the government.
2. Buying through a brokerage firm – Brokerage firms have inventories of bonds that they purchased from an open market.
If you buy a bond in their inventory, it might appear as if you are not paying any commissions. However, they can mark up the price, i.e., sell the bond to you at a price higher than the price at which they purchased it. Brokerage firms normally don’t disclose the amount by which they mark up the price. However, you can calculate it out yourself by using Yahoo Finance to find the price at which the bond was sold recently.
Similar to a markup price, the brokerage firm may charge a markdown price when you sell a bond to the firm.
If you want to buy a bond that is not in their inventory, you have to pay a commission to the firm. Commissions are generally charged as a percentage of the bond’s price. You can ask the firm to find out how much this commission is.
These are some of the information you have to figure out before choosing a brokerage firm.
Types of Bonds
There are three major types of bonds. Depending on the risk you want to take, the amount you want to invest, and the amount of resulting taxes, you can choose one of these.
Corporate bonds – Corporate bonds are bonds issued by private companies. They are riskier but offer better interest rates. However, the interests are taxable.
Government bonds – These are bonds issued by the government. They offer lower interest rates. But, the interest could be exempt from state and federal taxes.
Municipal bonds – Municipal bonds are issued by a municipality, state, or country. Even though the interest rates are lower than other types of bonds, the interest is tax-free.
Scores (Bond investor)
Savings ROI Ease of Accessibility Risk
HighMedium ( > Term deposit account, but < Stocks)Very lowMedium (< Stocks)
Savings – HighROI – Medium ( > Term deposit account, but < Stocks)Ease of Accessibility – Very low Risk – Medium (< Stocks)
Scores (Bond trader)
SavingsROIEase of AccessibilityRisk
LowHigh ( > Term deposit account, but <= Stocks)Low Medium (< Stocks)
Savings – LowROI – High ( > Term deposit account, but <= Stocks)Ease of Accessibility – Low Risk – Medium (< Stocks)
3. Mutual funds
To understand what Mutual funds are, read the following example.
Let’s say you have $3000 to invest. Several cases are possible, depending on your investing strategy.
Case 1: The Risk-taker and stocks
Let’s assume that you like to take risks that pay off well. So, you invest $3000 in a company’s stock. Based on its recent history, you expect it to perform well.
Positive scenario
Everything goes as per plan. In two years, your stock grows by 30% to $3900. You sell it and make a profit of $900.
Negative scenario
Nothing goes according to plan. In two years, your stock has come down by 30% to $2100. Market experts speculate that the company might shut down soon. So, you sell your stock and suffer losses amounting to $900.
Case 2: The Risk-taker and Bonds
Let’s assume that you like to take risks that pay off well. So, you buy three Bonds from a company totaling $3000. The company’s credit rating is poor. So, it promises a yearly interest rate of 30% and promises to pay back your $3000 in 2 years.
Positive scenario
Everything goes as per plan. In two years, you have gotten your $3000 back. In addition to that, you have made a profit of $900 + $900 = $1800 (assuming that you don’t reinvest the interest).
Negative scenario
Nothing goes according to plan. Within a year, the company has defaulted. After the company sells all its assets, you get back only $900. So, you have suffered a loss of $2100 by investing in the company’s Bonds.
Case 3: The Safe-player and Bonds
You are a person who likes to play it safe. So, you take the $3000 and invest it in secure Bonds for five years. But since the company has high credibility, you get only an interest rate of 2% p.a.
Positive scenario
In two years, you sell the Bonds when they are trading at $3090. So, now, you have made a profit of $3090 – $3000 = $90 + 2 x $60 (Interest payments every year) = $210. In addition to that, you have gotten your $3000 back.
Negative scenario
The Bonds you have purchased don’t do well in the Bond market. If you sell them, you will incur losses. So, at the end of two years, you have made a profit of 2 x $60 = $120. But, your initial investment of $3000 is still stuck in those Bonds.
You wait another three years till they expire. By the end of five years, you have made a profit of 5x$60 = $300 and got your initial investment of $3000 back. But in these five years, you have missed many opportunities for investing this $3000 to make better profits.
Case 4: The one who diversifies
You are a person who doesn’t keep all your eggs in a basket. So, you invest $1000 in the stock (Case 1), $1000 in the low-profile bond, and $1000 in the high-profile bond (Case 3). Since there are three investments in your portfolio, the chances of all of them generating profit or loss are meager. But for the case of argument, let’s consider the best- and worst-case scenarios.
Best-case scenario:
At the end of two years, you get profits from all of your investments.
Stock : 30% x $1000 = $300
Bond 1: 2 x (30% x $1000) = $600
Bond 2: 2 x (2% x $1000) + ($1030 – $1000) = $70
So, you get a total profit of $970 from all your investments at the end of two years. You also get your initial investment of $3000 back.
Worst-case scenario:
At the end of two years, you suffer losses from all your investments.
Stock : -30% x $1000 = -$300
Bond 1: -$700 (You get only $300 back from your original investment of $1000)
Bond 2: 2 x (2% x $1000) = $40
So, you suffer a loss of $960 (-$300 -$700 + $40) from all your investments at the end of two years. The initial amount of $1000 you invested in bond 2 is still safe. Of the remaining $2000 you invested, you have $1040 remaining to invest now.
As you can see, by diversifying, you can reduce your losses (Please note that the worst-case scenario mentioned above may never happen). At the same time, you won’t get the best gains out of it as well. Diversification makes sure that your investment remains safe while giving you reasonable returns.
This is exactly what a mutual fund does. It diversifies your investment portfolio. A mutual fund is a company that invests its money in different stocks, bonds, and other securities. By buying a mutual fund, you are purchasing a share (stock) of that company. The value of your mutual fund depends on the performance of the individual investments in the investment portfolio of that company.
By investing in a mutual fund, you can minimize your losses and keep your investments safe, while receiving better returns than a Term deposit account. Moreover, a mutual fund offers other advantages as well.
Less stressful – Even though diversification is a wise thing to do, choosing the individual investments to add to your profile can be stressful. If you are new to investing, it can be far too much for you to handle. Mutual funds take this stress away by choosing individual investments. Your job is to find a mutual fund that suits your strategy.
Affordable – To truly diversify your portfolio, you need a huge amount of money (>$10,000). But you can buy a mutual fund for a fraction of the cost (<$500).
Managing your funds – If you want to hire a fund manager who tracks your investments daily, it can cost you a lot. A lot of professional fund managers only manage the accounts of investors who have at least $100,000 to invest. Professional fund managers buy and sell securities in a mutual fund. By investing in a mutual fund, your money (as well as others’ money) will be invested in securities to meet your goals.
Easy withdrawal – Mutual funds deal with the investments of multiple people. So, they always have cash readily available, should any investor want to sell his/her mutual fund. So, you can be sure that you can get your money when needed.
Dividend reinvestment – Whenever a stock in a mutual fund pays dividends or a bond in a Mutual fund pays interest, mutual fund collects these payments. It then distributes these payments as mutual fund dividends to you and other investors. You can ask the company to automatically reinvest these dividends into the same or another mutual fund.
Also known as Stock funds, this type of mutual fund invests in stocks.
Based on the market cap of the companies they invest in, equity funds can be categorized into large-, medium- and small-cap funds. Market cap (=share price x number of shares) is the overall market value of a company.
Based on the investment strategy, equity funds can be categorized into value-, blend- and growth-funds. Value funds invest in undervalued stocks. These stocks have prices that are low at present but have high chances of increasing in the future. Growth funds, on the other hand, invest in high-performing, expensive stocks. These are the stocks that have shown nice growth in the past and can continue growing in the future. Blend funds are mutual funds that lie in between value and growth funds.
Industry (sector) funds, another category of equity funds, enable you to invest in the stocks of companies in a particular industry. For example, if you think companies like KFC, Mc. Donald’s and Subway will grow in the future, you can invest in the fast-food industry fund.
The risk in an equity fund is that it depends on the rise in the price of the underlying stocks.
Fixed-income funds
This type of mutual fund focuses on purchasing government and corporate debt. It is relatively safer than equity funds.
Also known as Bond funds, fixed-income funds invest primarily in bonds. The underlying bonds pay a percentage of the investment as interest every month. These interests, when added up, become the source of income for the fixed-income fund. This income is then passed on to the investors at regular intervals (usually every month).
Bond funds can also differ based on the strategy of investing. Some bond funds focus on secure government debts. Such a bond fund can keep your money safe but only offers low returns every month. In contrast, some bond funds focus on buying undervalued junk bonds to sell them at a profit. Such a bond fund can promise you high returns, but you may not get your money back.
Money-market funds
These are mutual funds that invest in short-term, safe debt (mostly government debt). The interest offered by a money-market fund is generally only slightly higher than a savings account. However, you can be sure that your money is safe and withdraw money whenever you need it. People nearing retirement are generally advised to invest their money here.
Balanced funds
These are mutual funds that invest in different asset classes (stocks, bonds, money market instruments, etc.) at the same time. There are two major types of balanced funds.
Specific allocation funds – You decide the percentage of your investment you want to allocate to each asset class. For example, you can allocate 40% of your money to stocks, 50% to bonds, and 10% to money market instruments.
Dynamic allocation funds – You give the fund manager the full freedom to allocate your money to different asset classes. Depending on your investment goals and the market’s performance, he/she can reallocate your money as he/she sees fit.
Different risks to consider while choosing a mutual fund
Risk of falling prices
Mutual funds offer an excellent way to diversify your investment portfolio. Yet, the value of a mutual fund depends on the underlying assets. As a result, there is the risk that the Net Asset Value of a mutual fund can be lower when you want to sell it. Net Asset of a mutual fund is the difference between its assets (e.g., stocks it purchased) and its liabilities (e.g., salaries of its staff). When you divide the Net Asset by the total number of shares of the mutual fund held by all its investors, you get Net Asset Value. For example, let’s consider a mutual fund X that has stocks from companies A, B, and C. Let’s assume that the stocks of A are priced at $10 each, B at $20 each, C at $30 each. Let’s say the mutual fund owns 3, 4, and 2 shares of A, B, and C, respectively. So, the value of all the stocks the mutual fund owns is (3 x 10) + (4 x 20) + (2 x 30) = 170. Let’s say that the mutual fund made a profit of $5 on that day. It also had to pay staff salaries of $2, other operating costs add up to $0.25, and miscellaneous expenses of $0.5. Let’s assume that the number of shares of the mutual fund in the market is 10. Then, the NAV at the end of that day can be calculated, as shown below:NAV = Net Asset / Total number of outstanding sharesNAV = [Assets – Liabilities] / Total number of outstanding sharesNAV = [(170 + 5) – (2 + 0.25 +0.5)] / 10 NAV = $17.23Trading price – Thus, a mutual fund has a Net Asset Value (NAV). However, its price in the market may not always be equal to its NAV. Several factors, including supply and demand, the popularity of its fund manager, etc. influence its trading price. If the mutual fund is in high demand, but the supply is lower, its price might be greater than its NAV. The same is true when the fund manager is known to make the right stock purchasing decisions. The reverse is also true.
Risk of dilution
A mutual fund can post good profits when starting out. Hence, it becomes popular and receives more funds. However, as the investments increase, it becomes difficult for the fund manager to find new profitable investments.
Too much diversification also means high profits from a few investments would make little positive difference. Hence, as the mutual fund company grows too big, the returns might actually start to reduce.
Risk of losing out
Stocks can be bought or sold any time the market is open. However, mutual funds can be bought or sold only at the end of the day. Therefore, if the price of a mutual fund rises during the day, but falls at the end of the trading day, you end up missing out on the opportunity to profit from the rise during the day.
Risk of too much liquid cash
Many people invest and withdraw money from a mutual fund every day. So, typically, a mutual fund has a lot of liquid cash available at any moment. It means that you can withdraw your money at any time. However, this also means that this money is not invested in the market. In turn, this can affect the returns offered by a mutual fund.
Risk of too little diversification
A mutual fund that focuses mostly on high-risk or industry-specific stocks is still prone to high risk.
Risk of too much fees
A mutual fund is managed by a professional fund manager. Regardless of whether the mutual fund makes profits or losses, the fund manager gets paid. Hence, in times when the returns are meager or negative, you could actually end up losing money. Moreover, mutual funds do a lot of purchasing and selling of assets (e.g., stocks). This leads to increased brokerage commissions, also known as trading costs. This cost is also typically borne by the investors. Entry loads (money for joining the mutual fund) and Exit loads (selling your mutual funds before the specified time) also add to the costs.
What should you research before investing in a mutual fund?
Since investing in a mutual fund can quickly turn out to be a costly endeavor, research about the following beforehand.
The Fund manager
The returns of a mutual fund depend mostly on the fund manager. If he is too greedy and invests in high-risk assets, you may end up losing your money. So, before you invest your money, find out how his/her career has been. Find out if he/she has expertise in finance and how his/her track record in the industry has been.
Entry and Exit loads
Enquire about the entry and exit loads before you invest in a mutual fund.
Taxes
The returns of some of the mutual funds could be taxed (e.g., bond funds with monthly returns). So, inquire beforehand about the taxability of the returns.
Scores
SavingsROI Ease of AccessibilityRisk
LowMedium to high ( > Term deposit account, but < Stocks)HighLow (< Bonds)
Savings – LowROI – Medium to high ( > Term deposit account, but < Stocks)Ease of Accessibility – HighRisk – Low (< Bonds)
4. Index funds
To understand what Index funds are and how they work, we should first know what a market index is.
What is a Market Index?
A market index combines the values of several assets of a particular type (e.g., the stocks of several companies) to calculate an aggregate value. It is a measure of the performance of an entire sector or the whole market (e.g., the stock market of a country).
The market’s performance in the future can be predicted by observing the change of market index over time. Investors generally compare the evolution of a stock’s price over time with that of the market index to figure out if the stock can be profitable.
For example, the S&P 500 is a market index in the USA. It is the aggregate value of the stock prices of the 500 largest companies in the USA. In the S&P 500, bigger companies have a greater impact on the index value.
For example, let’s assume that there are three companies A, B & C. A has 3 shares, which cost $100 each; B has 5 shares, which cost $150 each; C has 8 shares, which cost $200 each. The total market value of the index tracking these stocks will be (3 x 100) + (5 x 150) + (8 x 200) = 2650.
Generally, the market index is assigned a base value at the beginning. Let’s assume this value to be 1000 here. Let’s see how the index value changes with the change in the market value of the index.
Market value Index value
Day 1 2650 1000
Day 2 2500 943.39 (= 1000 x 2500/2650)
Day 3 2700 1018.86 (= 1000 x 2700/2650)
Day 4 2800 1056.60 (= 1000 x 2800/2650)
Day 5 2829 1067.54 (= 1000 x 2829/2650)
Market value Index value
Day 1 2650 1000
Day 2 2500 943.39(= 1000 x 2500/2650)
Day 3 2700 1018.86 (= 1000 x 2700/2650)
Day 4 2800 1056.60 (= 1000 x 2800/2650)
Day 5 2829 1067.54 (= 1000 x 2829/2650)
Hence, the index value provides a benchmark for comparison. Comparing a company’s stock price with this benchmark can help you figure out its performance with respect to the market.
What is an index fund?
An index fund is a type of mutual fund. It is a collection of assets (e.g., stocks) created to resemble a particular market index. It was invented in the 1970s to be an alternative to the notorious mutual funds that charge high fees.
For example, there are index funds in the USA that resemble the composition of the S&P 500. They have stocks in all the same 500 companies that constitute the S&P 500. They may even use the same weights.
In a mutual fund, a fund manager actively selects the stocks to buy and sell so that maximum returns can be assured. However, as the mutual fund grows, the fund manager has to keep finding new profitable stocks. Therefore, as the mutual fund grows, the difficulty in managing it grows with it. Hence, the returns from a mutual fund could shrink with time. However, by creating an index fund using the same stocks used in a market index, the hassle of active management of stocks can be evaded.
Hence, the returns of an index fund don’t shrink with time. So, in the long run, an index fund can become more profitable than a mutual fund.
Costs
Mutual funds need an active fund manager who has to be paid every month. His salary is taken from the investments of the investors. So, mutual funds are costlier. On the other hand, index funds are passively managed. There is no active fund manager who needs to be paid every month. Moreover, there is no rapid active purchasing and selling of stocks. Consequently, they don’t pay high trading fees. Hence, index funds are cheaper than mutual funds. This lower expense in index funds translates into higher returns over the long term.
The randomness of a stock’s price
In a mutual fund, a fund manager tries to select undervalued assets (stocks, bonds, etc.) to sell at a higher price later. However, every other fund manager and investor is trying to do the same thing. So, he has to compete against other investors and fund managers to successfully outperform the market and make profits.
In sectors where the information about companies is publicly available, fund managers compete against each other using the same information. Therefore, fund managers can’t outperform the market in the long run. For example, let’s assume that, on a particular day, the S&P 500 index opens at $1000 and closes at $1002. An index fund that tracks this index could make a profit of $2 at the end of the day. For a mutual fund to outperform this index fund, it should make a profit more than $2 during the same duration.
For this to happen, the mutual fund’s fund manager should be able to find a combination of stocks that performs better than the market index. He has to keep doing this again and again, for a mutual fund to remain profitable for a long time. Please note that the above scenario ignores the additional costs that come with maintaining a mutual fund.
Wrong decisions
A fund manager selects a stock based on its expected future profits, calculated using its past values. But, there is no assurance that a stock’s future values will follow the same trend as its past values. Therefore, eventually, a fund manager might make wrong decisions and lose money. Since an index fund is passively managed and depends on the market, the risk of losing money is lesser. Therefore, compared to a mutual fund actively managed by a fund manager, a low-cost index fund that mimics a particular market index can become profitable in the long run.
What should you know before selecting an index fund?
Index funds are profitable only in the long run. For short-terms less than years, actively managed mutual funds can give you higher returns. An index fund’s goal is not to beat the market and get profits better than everyone else. It is to match the returns of the market, believing that the market always wins. By investing in an index fund, you probably won’t make remarkable profits in the short term. However, you will get results consistent with market growth in the long run. If your goal is to invest in large-scale companies with consistent growth, an index fund is the right choice. However, if your goal is to invest in small-scale companies that are still undervalued to make short-term profits, mutual funds are better. Index funds are not risk-free. If the entire market is in a state of decline, returns offered by index funds will decline as well. On the other hand, in a mutual fund, an excellent fund manager can sense market decline and reinvest your money to avoid losses. Index funds are traded like mutual funds. They can be traded after the markets close at the end of the day. If you want to buy or sell a mutual fund, you only get the price it has at the end of the day. If stock prices rise during the day and fall at the end of the day, you cannot benefit from this rise. Similar to a mutual fund, the dividends from an index fund can be automatically reinvested. Index funds can be bought from a mutual fund company or a brokerage firm.
Scores
SavingsROI Ease of AccessibilityRisk
LowHigh ( > Mutual funds)HighLow (< Mutual funds)
Savings – LowROI – High ( > Mutual funds)Ease of Accessibility – HighRisk – Low (< Mutual funds)
5. Exchange-Traded funds (ETF)
ETFs were invented in the 1990s to serve as a cheaper alternative to mutual funds. They are similar to index funds in the fact that they track an underlying index. However, the difference is that ETFs can be traded like stocks. They can be bought and sold like stocks at any point in the day. As an ETF is bought and sold, its share price rises and falls in response.
ETF offers several advantages over a normal mutual fund. To understand these advantages, we have to understand how an ETF works.
How does an ETF work?
Whenever an ETF wants to create new shares of its own fund, it seeks the help of an Authorized Participant.
The ETF gives the AP (Authorized Participant) the list of assets (e.g., stocks) that constitutes an ETF. AP is generally a person or institution with a lot of buying power.
Creation and Redemption
The AP purchases these stocks from the open market and delivers them to the ETF. In turn, the ETF gives the equivalent number of ETF shares to the AP. Each share of the ETF is priced at its Net Asset Value (NAV). This is called Creation.
Conversely, if the AP wants to get rid of the ETF shares, it can give back the ETF shares and get back the underlying stocks from the ETF. It can then sell these underlying stocks to get back the money it invested for the ETF.
How does the AP benefit from this?
Like mutual funds and index funds, the trading price of an ETF can be different from its NAV. So, the AP is always watching the ETF in the market for price deviations.
Case 1:
Let’s assume that the NAV of an ETF is $100. But due to its demand, its price goes up to $105, while the NAV is still $100. This means that the EFT price has increased without a rise in the costs of the underlying stocks. Now, the AP starts selling ETF stocks at $105.
So, the supply of the ETF stocks increases, and its price reduces. At the same time, the AP goes and purchases the underlying stocks that make up the ETF at $100. So, the prices of the underlying stocks go up. The NAV of the ETF increases as a result. The AP does this until the trading price of the ETF and its NAV equalize (say $101).
During this process, the AP sells the ETF at $105 and purchases the underlying stocks at $100. So, it has made a profit of $5. At the same time, the NAV of the ETF increases to $101, attracting more investments. Therefore, both the AP and the ETF benefit from this mechanism.
Case 2:
Now let’s consider the opposite case. Let’s assume that the ETF’s price has gone down to $95, even though its NAV is $100. The AP purchases several shares of the ETF at the reduced price of $95. This increases the demand for the ETF, thereby pushing its price up. Then, the AP approaches the ETF and exchanges some of the ETF shares for the underlying stocks.
Finally, it sells these underlying stocks in the market, thus increasing their supply. Therefore, the prices of the underlying stocks go down. This process continues until the price of the ETF and its NAV equalize (let’s say $99).
The AP purchased the ETFs at a discounted rate of $95 and redeemed them at the NAV of $100. So, the AP has made a profit of $5. At the same time, the AP has increased the ETF’s price from $95 to $99 to equalize it to the NAV. So, it is profitable to the ETF as well.
ETFs vs. mutual and index funds
Costs
In a mutual fund, a lot of purchasing and selling happens, incurring a lot of transaction fees. In an ETF, all the purchasing and selling are done by the AP. So, there aren’t any transaction costs incurred by the ETF. If an investor wants to sell his shares, the mutual fund has to sell its underlying stocks. This incurs transaction costs, which affect the returns of the mutual fund. On the other hand, an ETF can sell its shares to another investor to raise the money. So, there aren’t any transaction costs in this case as well.
Transparency
A mutual fund is not obliged to disclose the identity of its underlying stocks. The stocks underlying an ETF is information that it provides to its APs. This information is freely available. So, before investing in an ETF, you can find out where your money will go.
Tax
Whenever a mutual fund sells underlying stocks, it has to pass on these gains (in some countries) to its investors. If these gains are big enough, you have to pay taxes. In an ETF, when the AP redeems the ETF shares for underlying stocks (case 2 above), the ETF can choose which shares to surrender to the AP.
Most of the time, it gives away the stocks that are highly profitable at the moment. So, if, at a point in time, the ETF sells its underlying stocks, there may not be any gains. So, it doesn’t have to pass on any money to its investors. So, you may not pay any tax until you sell the ETF.
Fair play
If the price of a mutual or index fund increases or decreases with respect to its NAV, there is nobody to regulate it. However, in an ETF, the APs regulate the market, ensuring that the EFT’s price always equals its NAV. So, you can always be sure that you are paying the fair price for an EFT.
Trading
Mutual and index funds can be traded only after the market closes at the end of the day. ETFs, however, are traded like stocks. They can be bought or sold throughout the day. So, you can sell an ETF when its price is high during the day and make profits.
What should you know about ETFs before buying one?
Tax benefits
Not all ETFs offer the underlying tax benefits. If an ETF consists of bonds, it might pay you dividends every month, which is taxable.
Index
Not all ETFs track an index.
Types of ETFs
There are different types of ETFs, including Currency ETFs, Bond ETFs, Commodity ETFs, and Industry ETFs. The tax benefits may vary from one type of ETF to another.
Diversification
Not every ETF offers diversification and reduces risks. Industry ETFs, for example, track a particular industry or sector. They offer less diversification and are prone to risks, because an entire industry may suffer losses. An example of this scenario would be the airline ETFs during the Corona outbreak.
Trading fees
ETFs can be traded throughout the day when the market is open. This creates the urge to sell or buy ETFs, thus incurring transaction costs. If you do this often, the costs may add up to affect your returns.
Returns
As with an index fund, don’t aim to beat the market with an ETF. Most ETFs track an index. So, they may not offer high returns.
Scores
SavingsROI Ease of AccessibilityRisk
LowHigh (<= Index funds)High (> Index funds)Low (< Index funds)
Savings – LowROI – High (<= Index funds)Ease of Accessibility – High (> Index funds)Risk – Low (< Index funds)
6. Peer-to-Peer Lending
As the name suggests, Peer-to-Peer Lending makes it possible for individuals to avail loans from other individuals directly. It eliminates the need for a middleman, normally a financial institution. It has only been in existence since 2005.
Borrowers
For borrowers, it offers lower interest rates and flexible terms when compared to banks. Peer-to-Peer lending companies don’t need collateral for issuing a loan. Instead, they assign a credit grade to the borrower.
The credit grade depends on the borrower’s credit score, income, loan amount, and term. The interest rate for the loan depends on the credit grade. The entire process, from applying for the loan and getting a loan, could finish within a few hours.
Lenders
As a lender, you can open an account with a Peer-to-Peer lending company and deposit an amount. You can choose whom to lend your money to, depending on his/her credit score, income-to-debt ratio, loan type, loan amount, loan term, etc. You don’t even have to loan the entire amount a borrower needs.
Instead, you can break your whole investment into small chunks called notes. You can then invest your notes in multiple loans. For example, if you have $1000 to invest, you can break it into 20 notes ($50 each) and loan it to 20 people. This offers the advantages of a mutual fund at a lower price.
You can diversify your investment by distributing your notes between high-risk, high-interest-rate loans, and secure loans. Thus, you can get higher returns while ensuring that you don’t lose all your money if some loans default. Indeed, some people who invested in Peer-to-Peer lending have reported double-digit returns every year.
What to know before you invest in Peer-to-Peer lending?
Risk
No investment is without risk. Peer-to-Peer lending is also risky. The average rate of default is higher in Peer-to-Peer lending than some other investments. Hence, if you invest all your money in a high-risk loan, hoping for high returns, you may lose everything. However, if you have diversified your investment, the probability of all the loans defaulting is very low.
Not tested –
Peer-to-Peer lending has been gaining traction for only a decade. Hence, it is not tested for recession. If the borrowers will repay the loan in a recession is a big question. This brings us to the next issue.
Not insured
Any investments you make in a Peer-to-Peer lending is not insured. So, making wise decisions on when to invest in Peer-to-Peer lending and which loans to pick lies entirely upon your shoulders.
Reinvest
In a government bond and a Certificate of Deposit, you invest a huge amount at the beginning. In return, you get regular interest payments until the expiry of the maturity period. Once the maturity period expires, you get your original investment back. But Peer-to-Peer lending works on the concept of loaning money.
At the end of the loan period, you won’t get your original investment back. Instead, you receive a part of your investment plus the interest every month. So, it is entirely upon you to reinvest this amount. If you keep spending the amount you receive every month, you won’t have any investment left when the loan period expires.
Costs
Before investing in a Peer-to-Peer lending company, find out who pays the commissions – You or the Borrower? If you have to pay the commissions, what percentage of your investment should you pay? Are there any hidden costs?
Taxes
How will you be taxed on your returns? Depending on your country, it may vary.
Transfer
Can you set up a retirement account and transfer your returns to it?
The credibility of the company
Before investing in a Peer-to-Peer lending company, find out how long it has been in existence. What do its customers say about it? Research properly because your investment is not insured.
Liquidity
Unlike bonds, notes are not traded in an exchange. So, early withdrawal is only possible if another investor takes over your loan. However, if interest rates rise during this period, nobody would be willing to take over your loan, which has a lower interest rate.
No fund manager
In a mutual fund, a fund manager takes care of all your investments. Even though it makes a mutual fund costly, at least you don’t have to worry about making the right choices. In Peer-to-Peer lending, however, you have to build your own portfolio. So, depending on the loans you choose, it can either be a boon or bane to you.
Scores
SavingsROI Ease of AccessibilityRisk
HighHighLowMedium to High
Savings – HighROI – HighEase of Accessibility – LowRisk – Medium to High
Even though a lecture on saving money can be a boring topic for many people, it is life-skill worth learning. By saving today, you will be protected tomorrow from unforeseen emergencies and financial burdens. Whether you are saving for your retirement, your children’s studies, or your own marriage, choosing the right saving method is important.
Since there are a lot of options available to choose from, choosing one can easily become stressful. This blog post lists some of the ways in which you can save your money and compares them so that you can make a decision easily.
1. Savings account
A savings account is the most common method of investment. It is risk-free since the savings account is insured by the government in most countries. Since the risk involved is low, the interest rate is also lower than most other investments.
Banks use the money in your savings account to lend loans to other people. So, the bank profits from the money you deposit in your savings account.
A savings account can help you to reduce your spending. In many countries, the number of times you can withdraw money from your savings account free of cost is limited.
A savings account is intended as a method of long-term investment. It helps you save money for planned and unplanned events in the future.
Nowadays, you can open a savings account with online banks as well. Online banks offer better interest rates when compared to traditional banks.
What should you look for in a savings account?
Depending on your needs, prioritize the following factors before finding a bank to open a savings account.
i. Interest rates
Obviously, you want to save money. So, it goes without saying that you need to find a bank that offers higher interest rates.
ii. Monthly fees
Depending on the country you live in, most banks might charge you a monthly fee for opening a savings account. Some banks might waive these fees if you have a minimum balance. Try to find a bank that suits your needs and read their terms of service before you sign up.
iii. Ease of withdrawal
Does the bank have an extensive network of ATMs? It is crucial if you want to tackle an unexpected emergency in the middle of the night.
iv. Automatic transfers
Does the bank let you transfer money from your checking account to your savings account automatically? That way, you will be saving money even in months when you have zero motivation to save.
v. Opening balance
This is not a deal-breaker. However, depending on your situation, you might need a bank that permits you to have an opening balance as small as possible.
vi. Insurance
In some countries, the savings account is insured by the government. Is it available in your country as well?
Scores
Ability to saveROIEase of AccessibilityRisk
MediumLowHighLow
Ability to save – MediumROI – LowEase of Accessibility- HighRisk – Low
2. Money Market Account
A money market account is not to be confused with a money market fund, which is a type of mutual fund. A money market account is a savings account that offers higher interest rates. Like savings accounts, it only permits a fixed number of free withdrawals per month. But, unlike a savings account, it comes with debit cards and the ability to write checks. But there’s a catch when it comes to money market accounts. They have higher minimum balance requirements. That’s why they offer better interest rates than a normal savings account.
What should you look for in a money market account?
i. Interest rates
This should obviously be the most important criteria in choosing a money market fund. Does it offer higher interest rates than traditional savings accounts? Does it offer higher interest rates than online savings accounts?
ii. Minimum balance
Is the minimum balance required to open an account too high for you? If not, you can invest in a money market account if it offers higher interest rates.
iii. Fees
Do they have any monthly fees? If yes, how high is it? Do you have to pay any penalties if your balance is less than the minimum balance required? If so, then how much is it?
iv. Insurance
In some countries, money market accounts are insured by the government. Is it available in your country as well?
v. Ease of withdrawal
Debit cards and the ability to write checks can make withdrawal easy. But they can also increase spending. So, depending on whether you want the flexibility or better savings, you can decide between getting a debit card, and not getting one.
Ability to save – Low (< Savings account)ROI – Medium (>= savings account)Ease of Accessibility – High (> savings account)Risk – Low (= savings account)
3. Term (Fixed) deposit account
A Term deposit account is also known as a fixed deposit account in some countries. It offers a fixed interest rate for a designated time (called the maturity period). Regardless of how the market varies and how the bank changes its interest, a fixed interest rate is assured. Hence, if the market performs poorly and the bank reduces its interest rates, your interest rate doesn’t drop. On the other hand, if the market performs better, and the bank increases its interest rates, your interest rate doesn’t rise either. The interest rate offered here is usually higher than the interest rate offered for a savings account. However, withdrawing money from a Term deposit account before the maturity period leads to penalties. In addition to that, adding more money to the term deposit account is not possible. You have to open a new term deposit account instead.
Hence, a term deposit account doesn’t provide as much flexibility as a savings account. But it helps you to save your money more than a traditional savings account.
What should you look for in a term deposit account?
i. Interest rate
This is obviously the most crucial factor. Your goal is to find the bank with the highest interest rate.
ii. Maturity period
Does the bank offer different maturity periods for you to choose from? Depositing a huge sum for an extended period will give you higher returns. However, shorter periods are sensible if you don’t have a separate emergency fund. Hence, having different options can help you make a better choice.
iii. SMS maturity reminders
Most term deposit accounts renew automatically upon the expiry of the maturity period. The interest rate that the bank offers at the time of expiry will be automatically chosen for the next term.
An SMS reminder on the expiry of the maturity period can help prevent such an automatic renewal with lower interest rates. You can then decide if you want to close the account or negotiate a better interest rate for the next term.
iv. Withdrawal penalties
How much does the bank charge for early withdrawal. Not everyone can keep depositing money regularly for a long time. For those cases, choosing a bank that charges a minimal premature withdrawal penalty is a wise choice.
v. Interest payout frequency
How often do you want the interest to be paid to you? Monthly, yearly, or only at the expiry of the maturity period? Choose the bank according to that.
vi. Interest payment between banks
You may have your savings or checking account in one bank and a term deposit account in another bank. In that case, does the bank deposit the interest from the term deposit account in your savings account in another bank? Choose a bank that does offer such an option.
vii. Collateral for a loan
Most banks allow the option of taking a loan against a fixed deposit account. Instead of breaking a term deposit account, you can use this option in an emergency.
The loan offered is usually a percentage of the term deposit account. It has to be repaid before the maturity period expires. The interest rate is lower than that of a personal loan, but higher than the interest rate on the term deposit account. You can compare banks based on these details too.
Ability to save – High (> savings account)ROI – High (>= Money market account)Ease of Accessibility – Low (< Money market account)Risk – Low
4. Recurring deposit account
A recurring deposit account is a type of term deposit account. In a recurring deposit account, you can deposit fixed sums of money every month. If you don’t have a huge amount of money already saved, you can opt for a recurring deposit account. It is a boon for everyone who cannot stop themselves from spending all the money they have. Just like a term deposit account, the interest rate is fixed. This ensures that you are not affected by market fluctuations. Also, you have to pay high penalties if you withdraw money before the maturity period expires.
What should you look for in a recurring deposit account?
All the factors that apply to a term deposit account affect the recurring deposit account as well. However, the maturity period plays an increased significance in a recurring deposit account.
i. Maturity period
This one is also important. In a term deposit account, you deposit a considerable amount early on and forget about it.
But, in a recurring deposit account, you deposit small sums of money at regular intervals until the maturity period expires. The period should be long enough to earn you a higher interest rate. At the same time, it shouldn’t be too long that you end up withdrawing money early.
ii. Collateral for a loan
Most banks allow the option of taking a loan against a recurring deposit account. Check the same details (as in a term deposit account), before choosing a bank.
Recurring deposit account vs. term deposit account
Consider the following cases:
You invest a huge amount in a term deposit account.
You invest the same amount split into smaller sums at regular intervals in a recurring deposit account.
They have the same interest rate. At the expiry of the maturity period, which of the two accounts will earn you a higher interest?
A term deposit account will earn you a higher interest because you invest the entire sum upfront. So, the interest rate applies to the entire sum for the entire period. However, this doesn’t hold true if the interest rate is compounded yearly, and both accounts mature in a year.
Scores
Ability to saveROIEase of AccessibilityRisk
High (> Term deposit account)High (< Term deposit account)Low (= Term deposit account)Low
Ability to save – High (> Term deposit account)ROI – High (< Term deposit account)Ease of Accessibility – Low (= Term deposit account)Risk – Low
5. Certificate of Deposit
A Certificate of Deposit (CD) is an excellent option for impulsive spenders to save money. It is an option offered by banks and credit unions. It offers customers fixed interest rates for depositing a considerable amount and leave it untouched for a specified time. There is a penalty for early withdrawal, but the interest rate offered is higher than a savings account. Since the interest rate is fixed, you are protected from market fluctuations until the maturity period expires. Hence, you won’t suffer any losses if the market suffers a downfall suddenly. But, in case the market performs better, you won’t be able to make any profits from it either. The early withdrawal penalty can help you save money. If you have a lump of money and are afraid of spending it, you can invest it in a CD. This ensures that your money is protected from your impulsive spending habit while earning a little interest.
Certificate of Deposit vs. Term deposit account
While a Term deposit account and a Certificate of Deposit may appear the same, there are some minor differences. A CD is generally used to save money for the short-term. A term deposit account, on the other hand, is used to save money for the long-run (10+ years). In some countries, you can take a loan against a Term deposit account. But, a CD doesn’t offer such an option. You can start a term deposit account with a minimal amount of money. A CD, in comparison, requires a huger deposit.
What should you enquire about, before opening a CD?
i. Duration
How long is the Certificate of Deposit for? This depends on your financial situation and the amount of money you wish to save. Longer durations typically offer higher interest rates because you can’t access your money for longer durations.
ii. Renewal
What happens when the duration expires? Does the CD get automatically renewed? If so, how will you be intimidated about it?
iii. Withdrawal penalty
How high is the penalty for early withdrawal of your money? Some banks might even offer a no-penalty CD.
iv. Insurance
Who is the issuer of the CD – A bank, a credit union, or a brokerage firm? Is your investment covered by insurance? One of the primary reasons why people invest in a CD is for the safety of their money. So, if your investment is not backed by insurance, what happens if the issuing agency goes bankrupt?
v. Interest payment
Will the interests be paid every month, every quarter, half-yearly, yearly, or only at the end of the maturity period? Are the interest payments taxable?
vi. Inflation
CDs are meant to park your money for shorter periods. If you invest in a CD for longer periods (> 5 years) and if the inflation increases during this period, the value of your money may depreciate. So, a CD with a longer maturity period is only worthwhile if the interest rate is more than the inflation rate.
Scores
Ability to saveROIEase of AccessibilityRisk
High (<= Term deposit account)High (>= Money market account)Low (<= Term deposit account)Low
Ability to save – High (<= Term deposit account)ROI – High (>= Money market account)Ease of Accessibility – Low (<= Term deposit account)Risk – Low
