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  • Audit Materiality 

    Audit Materiality 

    The auditor uses the idea of Materiality to assess the risks of material misstatement and determine the nature, timing, and scope of risk assessment methods. This approach is crucial to the audit process as a whole.

    Thus, Materiality is an essential aspect of auditing. 

    This article will cover everything about the materiality concept in audit, its types, why it is necessary, and what factors are responsible for affecting Materiality.

    What is Audit Materiality?

    Choosing a benchmark that has been utilized to effectively ensure that if the auditor does not discover any accounting error, it won’t materially mislead the clients of the financial statements is known as “audit materiality. 

    International Financial Reporting Standards (IFRS) asserts that any transaction can be regarded as substantial if its exclusion or misstatement from the financial statements can potentially affect the decision of the various stakeholders.

    Materiality in audit refers to quantitative and non-quantitative disclosures and amounts in financial statements. For instance, the user of financial information may be influenced economically by the lack of or insufficient exposure to accounting policy for a significant portion of the financial statement.

    Factors Affecting Materiality

    Following the firm’s guidelines or a general rule of thumb is not sufficient for calculating Materiality.

    For reference, a team of engagement experts determines Materiality as 10% of adjusted earnings before tax after eliminating extraordinary items. The choice of Materiality would still need a great deal of professional judgment, even if the firm had materiality standards restricting the engagement team’s selections.

    How did the engagement team determine, for instance, that 10% was suitable and that net income was a convenient base?

    To Ascertain the overall Materiality:

    • The auditor’s decisions are influenced by the degree, nature, or combination of the misstatement and the company’s circumstances.
    • The general financial data needs for users as a group, rather than the particular requirements of each user, are considered when making decisions about items that are material to users of the financial statements.

    How to Determine the Audit Materiality?

    There is no concrete structure for determining the audit materiality of any transaction within the financial statements, as was already indicated above. However, auditors frequently depend on their professional judgment or specific rules (described under “Audit Materiality guidelines).

    Since the concept of Materiality is relative and greatly influenced by size and external factors, the auditor must have a solid understanding of how to apply it. The degree and kind of error are considered when determining whether it is substantial.

    Example of Audit Materiality

    Let’s take the case of the company Aayush Bhaskar Pvt Ltd. as an example, which requested a ₹5,00,000 loan from the bank. The bank provided the loan, but only under the condition that the business’s current ratio does not drop below 1.0.

    The business accepted this, and a contract with the bank was created. The company’s auditor learned about this arrangement while carrying out the audit.

    The company’s current ratio is only a little bit higher than 1.0. For the company’s auditor, a slight error of ₹12000 can now be significant. It can result in a breach of the contract between the business and the bank.

    The company’s current ratio would drop below 1.0 with the ₹12,000 error added on. As a result, given that it may result in an agreement violation, this would be considered material to the audit. It may legitimately affect how the users of the company’s financial statements make economic decisions.

    Why Is Audit Materiality Important?

    • The crucial idea of audit materiality considers both quantitative and qualitative factors. Both factors affect how the company’s financial statement users make financial decisions. 
    • Their economic decisions are greatly influenced by qualitative factors, including the company’s sufficient disclosure of contingent liabilities, related party transactions, changes in accounting rules, etc.
    • It serves as the foundation for the auditor’s view of the company since it gives the auditor the assurance needed to determine whether or not the company’s financial statements are free of serious misstatements.

    Relevance of Audit Materiality

    The financial statements as a whole, including their content and type of testing, must be considered by the auditor when determining the Materiality level. The auditor’s conclusion is based on their assessment of the amount, nature, context, and effect on users of the financial statements due to the misrepresentation.

    Limitations of Audit Materiality

    • The objective of the Materiality may be hampered if the auditor cannot set it at the appropriate level.
    • The company’s auditor may miss the misrepresentation that impacts the company’s compliance with regulatory standards.
    • Comparatively to the quantitative technique, the qualitative approach is typically fairly challenging to measure.

    Types of Materiality

    • Materiality meaning in audit, can be divided into four types. All four types are mentioned below:

      Overall Materiality

      The auditor establishes Materiality for the entire financial statements while designing the overall audit plan. Above that point, the financial statements would be significantly misstated. This is considered overall Materiality or “materiality for the financial statements as a whole.”

      Performance Materiality

      As a “safety net,” performance in audit materiality is set below overall Materiality to reduce the possibility that all unrepaired and undiscovered misstatements will have a material impact on the financial statements.

      Performance materiality permits the auditor to react to specific risk evaluation (without affecting overall Materiality) and to bring the possibility that the total of unrepaired and undiscovered misstatements surpasses overall Materiality to an adequately low level.

      Specific Materiality

      The materiality level chosen to identify potential errors is known as specific Materiality. These could exist across several departments within an organization for specific types of transactions and for account balances that could influence the users of the company’s financial statements’ economic choices.

      Specific performance materiality

      Performance materiality and specific performance materiality are identical concepts; however, specific performance materiality is measured based on specific Materiality rather than overall Materiality.

    Some Important Points

    • In the context of audit materiality, both the quantitative and qualitative factors are taken into account. 

    • The quantitative factors include putting up a preliminary judgment for the Materiality, evaluating the performance materiality, calculating the number of misstatements in a cycle, accounting, etc.

      The qualitative factors include making enough disclosures about the company’s contingent liabilities, making the appropriate disclosures about dealings with the company’s connected parties, making the disclosure regarding any changes in the company’s accounting policy, etc.

    • Recognized Misrepresentations, Probable Misstatements, Apparent Aggregate Misstatements, Additional Possible Misstatements, and Maximum Allowable Misstatements are only a few of the forms of misstatements that an auditor must take into account while dealing with significant misstatements.
    • There are three categories of audit materiality: overall, performance, and specific. The auditor uses these in various business scenarios.

     

    Conclusion

    The opportunity is provided by audit materiality to the company, auditor, and viewer of the financial statement. The materiality level is set at the point where it is conceivably possible for users of the company’s financial information to be influenced economically.

    As a result, the principle of audit materiality is essential because it serves as the foundation for the audit’s task scope. In the end, the shareholders and other end users of the financial statements find the final judgment of the auditor in the financial statements to be the most influential economic decision-making instrument.

    References

  • Cash Budget – Method of Preparation 

    Cash Budget – Method of Preparation 

    A precise statement that shows projected forecasts of the cash revenues and payments for a given period is known as a cash budget. It is an operating budget that is helpful for an organization’s financial management. 

    A cash budget, often known as the “Nervous System of Budgetary Control,” is crucial for businesses. Additionally, it goes by the name “Cash Flow Plans.” It primarily relies on cash receipts and payments to function. These elements are determined by examining the flow of funds within and beyond the company.

    What is Cash Budget?

    A cash budget forecasts a business’s cash flows over a specific period. The budget could cover a week, month, quarter, or year. The entity’s ability to maintain operations for the given period is assessed using this budget. It also helps determine an optimal cash allocation (and any surplus) by providing a company with information about its financial requirements.

    Cash budgets are typically evaluated in either the short or long term. Short-term cash budgets concentrate on cash requirements for the next week or months, while long-term cash budgets concentrate on cash requirements for the next year to several years.

    Objectives of the Cash Budget

    • The main goal of the cash budget is to forecast a company’s future cash position so that management can determine when additional funding will be needed to ensure smooth business operations.
    • It is also prepared to assess whether there is any available surplus cash; if so, it must invest it wisely to maximize its benefits to the business.
    • Moreover, they are equipped to forecast the cash surplus and deficit for the given time frame.

    Cash Budget Format

    There are four sections in the cash budget format:

        • It lists all cash inflows, excluding money received for financing, under “Cash Receipts.”
        • All cash payments, excluding principal and interest payments, are referred to as cash disbursements.
        • It determines whether the company will need to borrow money or whether it will be able to return money that has already been borrowed.
        • The financing section describes the estimated borrowings and repayments throughout the budget period.

          • budget period.

      Details and particulars

      Month 1

      Month 2

      Month 3

      Opening Balance


      1. Receipts

      Cash Sales

      Collection from Debtors

      Call money on Shares

      Loan Received

      Sale of Capital Assets

      Other Receipts

      …..



      …..

      …..

      …..

      …..

      …..

      …..

      …..



      …..

      …..

      …..

      …..

      …..

      …..

      …..



      …..

      …..

      …..

      …..

      …..

      …..

      Total (A)

      xxxx

      xxxx

      xxxx

              (B) Payments:

      Cash Purchases

      Payment to creditors

      Salaries and Wages.

      Payable & Interest

      Capital Expenditure

      Loan Repaid

      Taxes

      Dividends


      …..

      …..

      …..

      …..

      …..

      …..

      …..

      …..


      …..

      …..

      …..

      …..

      …..

      …..

      …..

      …..


      …..

      …..

      …..

      …..

      …..

      …..

      …..

      …..

      Total (B)

      …..

      …..

      …..

      Closing Balance( A-B)

      ….

      …..

      …..

    A cash budget example

    Consider XYZ Clothing, a shoe manufacturer, which projects $200,000 in sales for June, July, and August. The company predicts monthly sales of 5,000 pairs of shoes at a retail price of $60 per pair. According to XYZ, 70% of the money from these sales will be paid out in the month that follows the sale, while the remaining 20% will be paid out two months later.

    The beginning cash balance for July is anticipated to be $20,000, and the cash budget anticipates collecting $140,000 (70% of $200,000), or 70% of the sales from June. XYZ also anticipates receiving $200,000 in cash from earlier-year sales.

    XYZ also needs to figure out the production expenses necessary to make the shoes and satisfy client demand on the expense side. Five thousand pairs of shoes must be produced in July to meet the company’s expectations.

    If the manufacturing cost is $50 per pair, XYZ will incur $250,000 ($50 x 5,000) in July. In addition, the company anticipates spending $60,000 on expenses like insurance that is not directly connected to manufacturing.

    XYZ calculates the cash inflows by adding the receivables collected in July to the starting amount, which is $360,000 ($20,000 for the beginning of July plus $140,000 from June sales collected in July plus $200,000 from previous sales).

    The business then subtracts the money required to cover production costs and other outlays. $310,000 is the total ($250,000 for the cost of goods sold and $60,000 for additional expenses). The final cash balance for XYZ for July was $50,000, meaning $360,000 in cash inflows less $310,000 in cash outflows.

    The Method of Preparing Cash Budgeting

    A cash budget is prepared in three ways. Cash budget methods are explained below:

    Receipts and Payment Method

    Utilizing receipts and payments is the most popular and simple method for developing a cash budget, particularly a short-term budget. The receipts and payment mechanism add all anticipated receipts to the opening cash sum.

    After completing the preceding computations, the expected receipts and any balance represent the closing cash balance. All projected cash payments then reduce the total opening cash balance.

    Adjusted Profit & Loss Method

    The basis for preparation under this system is the profit and loss account. This model assumes that each gain and reduction in the cash balance represents a profit or loss for the company.

    When creating a profit and loss statement, losses on asset sales, depreciation,  goodwill write-offs, and other costs that don’t involve actual cash transfers are subtracted from the business’s income. It is added to other earnings, such as the profit from the sale of fixed assets, to arrive at the company’s net profit.

    Moreover, to create a cash budget using this method, all non-cash expenses are added to the net profit, and all non-cash incomes are subtracted. The sum is multiplied by the opening cash balance to arrive at the cash balance. Then adjustments are made to capital receipts and payments, working capital changes, and financing-related flow changes.

    Balance Sheet Method

    A budgeted balance sheet is prepared under this method, which includes all assets and obligations except the cash balance. The balancing figure is thought to reflect the monetary balance. If the liabilities exceed the assets, the balance is a conventional cash balance; if the assets exceed the liabilities, the balance is assumed to be a bank overdraft.

    Conclusion

    The most significant of all operating budgets is the cash budget. However, it is prepared after completing all other functional budgets. The cash budget summarizes the expected cash revenues and payments for a certain period, and it assists management in making cash arrangements if sufficient cash is not available at the end of each month. 

    The company can cover all operating expenses and other obligations in this manner. On the other hand, if surplus capital is available at any moment, management can make appropriate arrangements for investments outside the organization.

    References

  • Cash Flow Statement vs. Income Statement: Meaning and Differences

    Cash Flow Statement vs. Income Statement: Meaning and Differences

     Finances are an important part of any organization, big or small. When running an organization, it is vital to keep track of them to estimate the performance and the future growth. There are many ways to determine a company’s progress. 

    But income and cash flow statements are the two most used methods in finance. Investors also use these two metrics while making investment decisions. After reading this blog, you will get familiar with these two financial statements and how to use them. 

    What is a cash flow statement?

    Running an organization is impossible without knowing the amount of business a company is making or spending. And the cash flow statement helps you with this exactly. With this, you can find the amount of cash coming in and out of the organization and from where. 

    It helps calculate the overall liquidity in the business, which helps in estimating the current and future state of cash flows. Three components come into the picture while noting the cash flow statement. They are operational, financial, and investing activities. 

    Below is the complete structure of a cash flow statement – 

    Operating

    It includes all a company’s cash from its products and services. They incorporate receipts from sales of goods and services, interest & income tax payments, inventory transactions, interest payments, tax payments, wages to employees, payments for rent, etc. In gist, this compromises all the transactions done because of operational activities. 

    Investing

    Investing activities cover resources and uses of cash from a company’s investments. This category includes activities like:

    • The purchase or sales of assets
    • Loans given to vendors or received from clients
    • Payments pertaining to Mergers & Acquisitions (M&A)

    Financing

    It includes cash utilized in business financing: money that goes in and out between a company and its owners & creditors. It covers transactions involving dividends, stock repurchases payments, and the corporation’s principal debt repayment (loans).

    How is cash flow calculated?

    There are two ways of calculating cash flow statements – direct and indirect. 

    Direct 

    The direct method totals all cash payments and revenues, including cash paid to suppliers, cash received from consumers, and salary payments. This way of calculating cash flow is more suitable for companies that use accrual accounting. 

    Indirect 

    The indirect technique calculates cash flow by altering net income by adding or removing differences deriving from non-cash transactions.

    What is an income statement?

    An income statement’s purpose is to determine a business’s profitability. In short, it tells how much profit/losses a company makes for a given period of time. 

    Also referred to as a Profit & Loss (P&L) statement, statement of operations, and statement of revenues & expenses, an income statement depicts a company’s financial position by calculating the income statement for a particular month, quarter, or year.

    How to find out net income with an income statement?

    Calculating an income statement is a straightforward method. To find out, we add all the revenues from operations and subtract all costs. These operations include both operating and non-operating costs. 

    Operating activities include all the activities related to running a business, such as purchasing, manufacturing, selling, and distributing goods and services. On the other hand, non-operational activities refer to those that are related to the sales and purchase of investments and assets. They also include payment of dividends, takes, and interest & FX gains/losses. 

    An income statement gives us the net come. If it is positive, then the company is in profit. However, the negative value indicates the net loss. 

    Cash flow statement vs. income statement

    Purpose 

    Cash flow monitors money that goes in and out of business. At the same time, the income statement determines how much profit or loss a company is in.  

    Format difference 

    We need both the income statement and the company’s balance sheet to make the cash flow statement format. In contrast, the income statement format requires various ledger accounts & records of a company.

    Activities  

    We use two activities – operations and non-operation, in finding out the income statement. On the other hand, the trio of operational, financial, and investing activities helps determine the cash flow.  

    The Derived System  

    The income statement is generated on an accrual basis, which means that the income and costs of a certain period are regarded. The cash basis is used to construct the Cash Flow Statement – how much money goes back and forth in a business. 

    Depreciation

    Depreciation is not reported in cash flow since it is a non-cash item. Still, it is recorded in the income statement.

    What statement should you go for?

    Both the financial statements are important determinants that serve a purpose in a company. 

    Suppose you want to measure how well the business is performing – what profits and losses are occurring. In that case, you should consider an income statement. 

    On the other, If you want to know anything about your business, such as how much debt your company may safely take on or how to create more cash, you should look at cash flow figures.

    FAQs

    How to calculate cash flow and income statement?

    To calculate net income, sum all operations revenues and deduct operations. These costs include both running and non-operating expenses. You can calculate cash in two ways – direct and indirect.

    However, a common method is to deduct your taxes from the amount of depreciation, working capital change, and operating income.

    What are cash and non-cash items?

    Any transaction involving a company giving or receiving cash is a cash item. Unlike cash items, non-cash items refer to some expenses & revenue without cash transactions. 

    Examples of cash items include salaries & wages, rent payments, and other payment services. Depreciation, stock-based compensation, and unrecognized profits or losses are examples of non-cash expenses.

    How is the balance sheet different from cash flow and income statements?

    At a given point in time, balance sheets reflect what a corporation has and what it owes. The balance sheet formula tells that the organization’s total assets are the sum of its equities and liabilities.

    The Bottomline

    Financial statements are crucial components of any business because they help understand a company’s performance and growth. The cash flow and income statements are the two financial statements we discussed in the blog. 

    Cash flow helps you understand the flow of money in your business, whereas an income statement gets you an idea about the profitability of your business.



  • Hurdle Rate vs. Internal Rate of Return (IRR)

    Hurdle Rate vs. Internal Rate of Return (IRR)

    Two essential measurements generally used in the investing and financial world are Hurdle Rate and Internal Rate of Return (IRR). Both of them are used for varying purposes. But there seems to be no end to the confusion they’ve caused among newcomers. So, if you cannot differentiate between hurdle rate and Internal Rate of Return (IRR), this post is meant to give you clarity. Let’s find out more about hurdle rate vs Internal Rate of Return here. 

    What is Hurdle Rate?

    Also known as the minimum acceptable rate of return, the hurdle rate is the lowest rate of return that an investment or a project must earn to offset the investment’s costs. Projects are also assessed by discounting future cash flows to the current hurdle rate to calculate the Net Present Value (NPV). 

    This, in turn, showcases the difference between the current value of cash outflows and the current value of cash inflows. Usually, the hurdle rate is equal to a company’s capital costs, which is the amalgamation of the cost of debt and the cost of equity. 

    Typically, managers raise the hurdle rate either for such projects that are riskier or when the company is comparing several investment opportunities.

    Understanding Hurdle Rate

    This metric describes an adequate compensation for the current risk level. The hurdle rate lets companies make vital decisions on whether to pursue a specific project or not. If the anticipated rate of return goes above the hurdle rate, the investment is regarded as sound. If it goes below the hurdle rate, the investment is considered riskier. 

    To determine the hurdle rate, some of the essential areas that should be considered are:

    • Associated risks
    • Cost of capital
    • Returns of other potential projects or investments

    Hurdle Rate Formula

    To calculate the hurdle rate, here is the hurdle rate formula that can be used:

    Hurdle rate = Cost of Capital + Risk Premium

    Hurdle Rate Example 

    Let’s consider an example to understand more about hurdle rate. Suppose you are looking forward to buying new machinery. As per the evaluation, with this new machine, you can increase the sales of your product, resulting in a return of almost 11% on the investment.

    The Weighted average cost of capital (WACC) for your company is 5%. The risk of not selling additional products is low. Thus, a low-risk premium got assigned at 3%. 

    Then, the hurdle rate will be:

    5% (WACC) + 3% (Risk premium) = 8%

    Since the expected return on this investment is 11% and the hurdle rate is 8%, which is lower, buying the new machine will be a sound investment for you.

    What is the Internal Rate of Return?

    The Internal Rate of Return (IRR) is the anticipated annual amount of money (expressed in percentage) that an investment is expected to generate for a company above and over the hurdle rate.

    The word “internal” denotes that the figure doesn’t account for possible external factors and risks, such as inflation. Also, IRR is used by financial experts and professionals to evaluate the expected returns on several stocks and investments, such as the yield to maturity on bonds.

    Understanding IRR

    Basically, the Internal Rate of Return (IRR) is one such discount rate that makes a project’s Net Present Value (NPV) zero. In simple words, it is the anticipated compound annual rate of return that will be earned on an investment or a project.

    You can only use IRR when looking at investments and projects with an initial cash outflow and one or more inflows. Moreover, this method doesn’t consider the possibility that various projects may have varying durations. 

    While it is comparatively straightforward to assess projects by comparing the IRR to the hurdle rate, this approach has specific limitations in the form of an investing strategy.

    For example, it considers only the rate of return, in contrast to the return’s size. A $10 investment returning $100 has a higher rate of return than a $10 million investment yielding $2 million. 

    Once you’ve determined the internal rate of return, it is generally compared to the cost of capital or a company’s hurdle rate. If the IRR equals or exceeds the cost of capital, the company will accept the project as a sound investment. And, if the IRR is lower than the hurdle rate, it will be rejected. 

    IRR Formula

    The IRR formula is as mentioned below:

     

    IRR mathematical formula.

    Here, 

    NPV = Net Present Value

    N = Holding Period

    n = Each Period

    CF = Cash Flow

    IRR = Internal Rate of Return

    One can do the calculation of the internal rate of return in three varying methods:

    • Using the XIRR or IRR function in a spreadsheet or Excel programs
    • Through an iterative process where an analyst tries a variety of discount rates until the NPV is equal to zero
    • Through a financial calculator

    IRR Example

    Before moving ahead with understanding IRR, you’ll first have to know Net Present Value (NPV). This is because the cash that you have today is far more valuable than the one you’ll get after five years, courtesy of inflation. Thus, when you think of investing money every year, you must first check its worth today. 

    So, let’s assume you invested Rs. 10 lakhs in a project X today. From the next year, this project will start making cash flows without the need for further investments. You can find more information on the money that you’ve invested today and the cash flows that it will generate in the future in the below-mentioned table.

    Time Period (Years)

    Cash Flow

    Today

    Rs. – 10 lakhs

    Year 1

    Rs. 2 lakhs

    Year 2

    Rs. 3 lakhs

    Year 3

    Rs. 3 lakhs

    Year 4

    Rs. 3.5 lakhs

    Year 5

    Rs. 3.5 lakhs

    Total Cash flow

    Rs. 15 lakhs

    Now, to find out NPV of the cash flows mentioned above, suppose IRR is approximately 8% for the project X. discount every cash flow with IRR while considering the time lapse. The NPV formula is:

    NPV = Cash Flow / Discount Rate + 1^N.

    Here, 

    N = number of years

    Time Period

    Project X

    Discount Rate

    NPV (Rs)

    Today

    Rs. – 10 lakhs

    8%

    (10 lakhs)

    Year 1

    Rs. 2 lakhs

    8%

    1,85,185

    Year 2

    Rs. 3 lakhs

    8%

    2,57,202

    Year 3

    Rs. 3 lakhs

    8%

    2,38,150

    Year 4

    Rs. 3.5 lakhs

    8%

    2,57,260

    Year 5

    Rs. 3.5 lakhs

    8%

    2,38,204

    Total cash flows

    		  

    11,76,001

    The table mentioned above displays that Project X has NPV worth Rs. 11.76 lakhs. And you’re investing Rs. 10 lakhs today. This simply shows that this project isn’t worth investing as you’ll only get the benefit of Rs. 1.76 lakhs after five years. 

    NPV should be more than zero, which means the project should give more returns than the money you’re investing today. 

    In the example above, if you replace put 13.92% in the place of 8%, the NPV will turn zero and that will be your IRR. Thus, IRR can be defied as the discount rate at which a project’s NPV becomes zero.

    Time Period

    Project X

    Discount Rate

    NPV (Rs)

    Today

    Rs. – 10 lakhs

    13.92%

    (10 lakhs)

    Year 1

    Rs. 2 lakhs

    13.92%

    1,75,569

    Year 2

    Rs. 3 lakhs

    13.92%

    2,31, 184

    Year 3

    Rs. 3 lakhs

    13.92%

    2,02,944

    Year 4

    Rs. 3.5 lakhs

    13.92%

    2,07,846

    Year 5

    Rs. 3.5 lakhs

    13.92%

    1,82,457

    Total cash flows

    		  

    10 lakhs

    Calculating IRR

      • In an excel sheet, enter the original invested amount, make sure you put a minus (-) sign in front of the amount
      • In every cell, enter the cash flows received in the respective year
      • Add minus (-) whenever you’re investing money
      • Find IRR by entering =IRR(values,guess)

    Number of Years

    Project X

    Today

    -1000000

    Year 1

    200000

    Year 2

    300000

    Year 3

    300000

    Year 4

    350000

    Year 5

    350000

    IRR

    14%

    Conclusion

    By now, it would be clear that both of the metrics – hurdle rate and Internal Rate of Return – are essential. In a corporation, both play an integral role in deciding whether an investment or a project will be worthwhile. If running a company, you must understand these concepts thoroughly and ensure their application is helping you achieve the best results. 

  • Getting well-versed with the Metaverse

    Getting well-versed with the Metaverse

    Wouldn’t it be great if you could have dinner sitting next to a friend who lives miles away from you? And that too, in the streets of Paris – from the comfort of your home? Sounds kind of impossible, right? Well, this might not be the case anymore.

    Welcome to the Metaverse! A virtual world with endless possibilities. A 3D world of the internet that is available to you constantly. As someone who belongs to Generation Z, I have had access to the internet from a young age. And the metaverse is something that I could see my generation readily adopting. In fact, there are already such virtual platforms in place, and they have captured quite a number of users.

    But what is not clear is what all does the metaverse actually encompass? If I ask 10 people, “What is the metaverse?”, they would give me 10 different definitions. So, what exactly is the metaverse? Is it just a temporary buzz or is it here to stay? Let’s find out.

    What does metaverse actually mean?

    The metaverse is a three-dimensional virtual internet simulation. It will allow users to behave and carry out all functions that they do in reality. Users will be able to do so along with millions of other users, within the virtual world. The metaverse is an extension of the present-day internet, and that too, a revolutionary extension. It will inherently change the way we look at all aspects of life, literally and otherwise.

    The word metaverse was first coined by Neal Stephenson in his 1992 sci-fi novel Snow Crash. In the book, people use digital avatars of themselves to eat, work, play in the virtual world. They do so as a means to escape their dystopian reality. And now, Facebook, or shall we say, “Meta”, is building on this very idea, minus the dystopia, of course.

    The metaverse is going to drastically change the way we interact with technology in our day-to-day lives. It will be characterized by virtual worlds, combined with the features of the physical world. These virtual worlds will go on to exist, even when you are not “playing” or interacting with them.

    Alternatively, it could also translate into a digital economy. That is, it will be a virtual space that allows users to create, buy and sell products and/or services. It would allow users to buy cars, clothes, accessories, and move them from one platform to another.

    “Doesn’t this kind of technology already exist?”

    The above description of metaverse might prompt you to think so. We already have virtual worlds in place. One example is the game – World of Warcraft, wherein players can buy and sell goods. A similar experience is rendered by Fortnite. In the game, you can attend live concerts and exhibits, and be in your own personal virtual home. You just need to strap on a VR/AR headset and you are good to go.

    However, the metaverse is not just limited to this.

    Metaverse will be based upon Web 3.0. It is the newest internet iteration with advanced, data-driven, and open websites. Its aim will be to create a level of transparency. This will happen because individual data will not be controlled by centralized organizations, rather it will be powered and stored on blockchains.

    Meta CEO, Mark Zuckerberg, is betting big on the idea of the metaverse. As per his vision, the metaverse will bring enormous opportunity to individual creators and artists; to individuals who want to work and own homes far from today’s urban centers; and to people who live in places where opportunities for education or recreation are more limited. A realized metaverse could be the next best thing to a working teleportation device, he says.

    And not just Meta, other tech companies are also moving fast in this space. Both Microsoft and Google are not far behind in this race to crack the metaverse technology. In fact, consumer brands like Walmart, Nike, Ralph Lauren, and Gap have also expressed interest in the metaverse. They have already started working on virtual landscapes.

    The metaverse will be a blockchain world, built on the Web 3.0 network, cryptocurrencies, and NFTs. NFTs are unique units of data stored on the blockchain. They track a specific digital asset’s ownership and transfers.

    Challenges ahead

    The metaverse seems pretty awesome. And it has gained quite the hype amongst the newer generations. However, there are still some challenges to combat and confusions to clear.

    No one is really sure what are the possibilities of Metaverse. And that is my major concern here. Meta wants to use the metaverse to make virtual houses, where people can invite their friends to hang out. 

    On the other hand, Microsoft wants to use the metaverse to create immersive virtual meeting rooms. These rooms will allow “people in different physical locations to join collaborative and shared holographic experiences, with the productivity tools of Microsoft Teams, where people can join virtual meetings, send chats, collaborate on shared documents and more.”

    Another important thing is who will control what the metaverse looks like? Who will control the type of content it hosts? Because surely, an open web network is bound to attract scammers and frauds. And if this metaverse is used by the younger generation as well, we can’t very well control who they interact with, or the type of content they consume.

    On the face of it, virtual worlds promise liberation and escape from the real world and feel like a digital utopia. The inhibitions, hierarchies, and limitations of the real world do not restrict these virtual worlds. Users can project whatever they want to do onto their digital avatars. 

    But this does not necessarily mean that the virtual world is better than the real world. Existing gaming platforms with metaversal characteristics have problems like worker exploitations, gender biases, and homophobia. Unless companies make conscious efforts to take care of these prejudices and biases, how can we say that the virtual world is better than the one we live in?

    Metaverse and Capitalism

    The next question that comes to my mind is, “Is the metaverse just another capitalism stint?” The metaverse appears to be capitalism at its height. It’s just a few tech giants controlling this space and creating a virtual world. That too, in the face of the actual world facing a scarcity of resources. 

    Quite simply, the metaverse is just another place to spend money. Its aim is to sell you items that you absolutely do not need. In reality, these items wouldn’t even physically exist.

  • Stock Exchanges in India

    Stock Exchanges in India

    A stock exchange is a focal place for investors and traders to buy and sell different financial securities such as stocks, Exchange-traded Funds (ETFs), and derivatives like options and futures. It brings buyers and sellers together under one roof to trade and profit from market inefficiencies (different between buying and selling prices). With advancements in this space, investors can trade across the country as well as globally with ease.

    In this article, we will talk about Indian stock exchanges, their history, different stock exchanges in India and more. 

    What is a stock exchange and how did it begin in India?

    In technical terms, a stock exchange is a platform permitted and authorized by the government that lets a company list itself and provides a marketplace for investors/traders to transact a company’s shares. In India, the Securities and Exchange Board of India (SEBI) regulates this space. In terms of market maturity, India is considered an emerging market because. 

    Established on August 31, 1957, the Bombay Stock Exchange (BSE) is India’s first official stock exchange. However, the history of the stock market in India is more vivid than this and dates back to the 19th century. The Native Share and Stock Broker’s Association was a known institution around 1875 for trading. It later became known as the predecessor of the Bombay Stock Exchange. 

    The Ahmedabad Stock Exchange began in 1894. However, it had the purpose to trade shares of textile mills; Ahmedabad was quite popular back then for its textile business. Followed by that, in different parts of the nation, new stock exchanges started to form, leading to where we are at present. 

    The stock market in India has its fair share of ups and downs, and as a result, in 1992, the regulatory body SEBI was established to ensure fair conduct and protect investors. 

    How many stock exchanges are there in India at present?

    There are currently 9 stock exchanges in India.

    1. BSE (Bombay Stock Exchange Limited) 

    Established in the year 1875, BSE is India’s first official stock exchange platform. It is situated on the famous Dalal Street in Mumbai. 5500+ companies are listed on BSE, making it the 10th largest stock exchange globally. 

    1. NSE (National Stock Exchange of India)

    Inaugurated in 1992 and started functioning in 1994, NSE is a competitor of BSE. NSE is also India’s first electronic exchange. Because of that, investors across the country could buy and sell shares with more accessibility to the stock market. Since its inception, NSE has improved a lot on its tech part and innovations to provide better services to investors. 

    1. CSE (Calcutta Stock Exchange Limited) 

    CSE began in 1830 when a bunch of brokers gathered under a neem tree to seal their deals. This practice continued and in 1908, it officially became Calcutta Stock Exchange. Electronic trading was introduced at CSE in 1997; it is the second oldest stock exchange in the South Asia region. CSE is no longer in use, but the case against terminating is still pending in court which makes it an active exchange in India. 

    1. INDIA INX (India International Exchange)

    For international trading, INDIA INX leads the pack. Established on January 9, 2017, It is based in GIFT City, Gujarat at the International Financial Services Centre (IFSC). Investors can directly purchase and sell individual stocks on this exchange of nations such as the US, Canada, Australia, and Japan. INDIA INX has the Eurex T7 platform which is considered the most advanced tech in the world. 

    1. National Stock Exchange IFSC Limited

    Quite similar to INDIA INX in location and functioning, this exchange is a subsidiary of NSE. It was launched to help the nation attract better investment opportunities and expand its market size. 

    1. MCX (Multi Commodity Exchange of India)

    MCX, established in 2003, was initially formed under the Forward Market Commission and later merged with the SEBI. It is India’s first commodity exchange and is situated in Mumbai. It has also been ranked 7th in the largest commodity exchanges in the world. From gold to crude oil to wheat, a majority of commodities can be traded in MCX. 

    1. NCDEX (National Commodity and Derivatives Exchange)

    Established on April 23, 2003, NCDEX is an online commodity exchange having headquarters in Mumbai. NCDEX’s ownership is majorly divided between institutions, companies and large public banks. It is open 5 days a week between 10 am to 11:30 pm. 

    1. MSE (Metropolitan Stock Exchange of India Limited)

    MSE began its operations in 2009. Currently, there are 1500+ companies listed on this exchange. Just like BSE and NSE, investors can buy or sell individual stocks on MSE. It offers trading in various segments including debt, equity, derivatives, and more. 

    1. ICEX (Indian Commodity Exchange Limited)

    ICEX is a commodity derivative exchange which is regulated by SEBI. It was established in August 2017 and is located in Mumbai. It allows trading to registered brokers for trading contracts across the nations. It is a permanently recognized exchange in India and is completely unique as it allows the trade of diamond derivatives as well. 

    How do companies get into a stock exchange?

    There are two ways for a company to get itself on a stock exchange. 

    1. i) IPO (Initial Public Offering): When a company decides to get listed on a stock exchange (go public), it offers IPO in the primary market. Investors apply for IPO and those that get allotments, receive the shares of that company.
    1. ii) Trading on the secondary market: All the shares are traded on the secondary market. Once the shares are offered under an IPO, it gets traded on exchanges like BSE, NSE, etc. 

    The bottom line

    Stock exchanges provide a medium for companies to get funds and investors with opportunities to get returns. With time, technology has advanced and stock exchanges have evolved with innovations, becoming more transparent and seamless. Investors can choose any exchange as per the instruments they want to trade via registering themselves on a broking platform and opening a Demat account.

  • What is Exponential Growth?

    What is Exponential Growth?

    If you are connected to the financial or business world, chances are you would have heard about exponential growth. This concept is generally used for representing an increase over a specific period. 

    A lot of professionals have been using exponential functions to comprehend variables in their studies, support diverse business decisions and discover factors that are influencing enough for a gamut of data.

    However, before anything else, it is essential to understand how such an increase can occur exponentially, especially if you are working in a certain industry that repeatedly depends upon statistical information. 

    In this post, let’s explore the meaning of exponential growth, who can use it, why it is essential and how it can be calculated with an example. 

    What is Exponential Growth?

    Exponential growth is referred to a data pattern that shows greater increases with time. Thus, it creates an upward trending curve on the graph, known as the exponential growth curve. 

    In the field of mathematics, when a function includes an exponent (or a power), the calculation will increase exponentially. For instance, if hens laid eggs thrice every year and tripled per year, in the second year, the number would be 27, and it will be 81 in the third year. 

    Understanding Exponential Growth

    In the world of finance, compound returns lead to exponential growth. The power of compounding is one of the powerful forces in this industry. This one concept lets investors create more considerable sums with minimal initial capital.

    One of the most common examples of exponential growth is market-linked investments carrying a compound interest rate. Your investments see exponential growth because of compound interest when you invest money in a market-linked investment option for an extended period. This shows how you grow your investment exponentially with minimal initial outlay.

    If the account offers a compound interest rate, you will get interested in the principal and the interest amount received from the preceding period. For instance, in the first year, you might get 8% interest on a bond with a face value of Rs.100  that matures in 30 years. Thus, you will get Rs.8. 

    In the following year, this 8% interest rate will be applied to Rs.108 and not Rs.100, keeping in mind the interest payment you received in the previous year. Hence, with every passing year, interest payments continue to amass and will be considered in the calculations of yearly interest payments by the time your financial instrument reaches maturity.

    Exponential Growth Formula

    On a graph or a chart, the exponential curve begins slowly. It remains closely flat for a time before swiftly increasing to become almost vertical. The exponential growth formula is as follows:

    V=S×(1+R)^T

    where, 

    S is the starting value 

    R is the rate of interest and 

    T is the elapsed number of periods

    Importance of Exponential Growth 

    Data that generally increases exponentially is vital for several careers. Apart from this, it is specifically essential in the following domains:

    • Finance and accounting
    • Business and data analytics
    • Scientific studies
    • Research and development

    Jotted down below are some additional (but equally important) value-added points of exponential growth:

    • Encourages Technological Innovation

    A lot of applications in the information technology and computer science industries depend upon statistical information for growth analysis. When developing artificial intelligence processes, machine learning algorithms, and automated software, programmers and data scientists may calculate exponential increases in results over time for a specific input in an environment that is surrounded by digitization. 

    For example, if a developer uses a specific algorithm as an input to create outputs over a certain period, calculating the growth can help comprehend whether or not the increase in value is an exponential function.

    • Assists Professionals in Discovering Trends

    Whether in finance and business, technology, science or health care, exponential increases in any sort of information can communicate growing trends. For example, clinical researchers might use this factor to graph an increase in positive health results with new medications.

    On the other hand, business leaders might also use this function to discover trends in consumer markets, costs of advertising and brand development.

    • Evaluates Important Financial Metrics

    The accounting and financial industries generally depend upon growth functions to figure out return projections for specific periods. One of the metrics is a compound return. It is an investment return type that accumulates on starting investment principal and any growth the investment comes across. 

    When compound returns accumulate, your investment account increases exponentially every time there is an increase in the principal. Such an exponential increase can also occur with loans in case of the interest compounds over time and is at an adaptable rate. 

    Exponential Growth Uses

    Often, exponential growth is used in financial modelling. While the concept is quite common in a high-interest savings account, the interest rates do not fluctuate or waver as much during several economic situations. But, when keeping stocks in mind, returns aren’t as smooth as anticipated. 

    Not just that, the technology sector uses growth rate calculations, such as AI design, machine learning and software development. Moreover, researchers and scientists use mathematical concepts, like exponential growth, to experiment and study several data. 

    This factor helps in:

    • Classifying factors and trends that can cause a multiplying increase in varying financial metrics, such as assets and liabilities, expenses, revenues, investments and compounding interest

    Overall, the models of exponential growth are beneficial in predicting the returns of an investment when the growth rate is consistent and doesn’t oscillate recurrently.

    Conclusion

    Regardless of the industry, it is evident that exponential growth is a highly essential factor that helps you draw conclusions to varying hypotheses. It does not just help financiers but scientists and IT personnel as well, among others. So, whenever you wish to take a huge business or investment decision regarding growth, make sure you consider the exponential growth formula and calculate it thoroughly. 

  • Fibonacci and the Golden Ratio in Finance

    Fibonacci and the Golden Ratio in Finance

    Introduction:

    Learning simple technical analysis takes you miles ahead in your journey of stock market trading/investing. 

    Technical analysis is very similar to leading a successful life. It focuses on strategy plus execution. Moreover, like a mentor, you just have to follow the trend line to stay afloat in the market. 

    Today, we talk about one of the most important ratios in technical analysis.

    There are some financial ratios that can help you study the stocks at the micro level, one such ratio is the Fibonacci also called the golden ratio. This ratio is symbolized using the greek capital “Φ” or with a small “φ”. We use these symbols instead of “PHI” because “π”. is an irrational number, that has no end. This formula was given by Leonardo Fibonacci, in his book ‘Liber Abaci’ that he published in 1228. 

    He mentioned a new number system that was different from the Roman numeral system that was prevalent during that era. This number system was eventually named after him.

    This is the Fibonacci number sequence

    0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597…etc.

    This sequence starts from 0, 1, 1, and every third number is the sum of its previous two numbers. 

    In the above case 1+1=2, then 1+2=3, 2+3=5 etc.

    What is the golden ratio?

    So one might wonder what is the Golden Ratio. The golden ratio is derived from the Fibonacci sequence.

    If we divide any number by its previous number, we always get 1.618033988749895… However, if we multiply any number in the sequence by 1.618…….. we always get the next number in the sequence.

    Fibonacci and the Golden Ratio

    One might wonder what is so important about the golden ratio. Well, several natural things adhere to the ratio of 1.618. It is believed that the Fibonacci ratio is one of the fundamental building blocks of nature.

    Golden Ratio Examples:

    Here are some examples of the Fibonacci golden ratio from our day-to-day life. Have you ever seen a bee hive? Did you know that if you divide the total number of female bees in the hive by the total number of male bees, you get a number around 1.618? This ratio can also be observed in several different components in nature.

    Besides this, some of the most renowned pieces of art are made on this golden ratio. The pyramids of Giza incorporate triangles whose dimensions are based on the golden ratio. Some other example of such a monument is the Parthenon in Athens. 

    The golden ratio Fibonacci seems like a naturally occurring phenomenon that is unavoidable. But this ratio works equally well for financial markets as they have the same mathematical base. Let us now understand the use of the golden ratio in the technical analysis of stocks:

    How to use Fibonacci Retracement Levels in Trading

    This golden ratio when further translated into percentages can be used for measuring the support and resistance levels of stocks. When the golden ratio is used for stock analysis there are four techniques that are mostly used. Fibonacci retracement, arcs, fans, and time zones.

    Here the golden ratio is converted into percentages. Typically, 3 percentages are widely used, to calculate the retracement levels of stocks. These are 61.8%, 38.2% and 50%. However, if required the other multiples like 23.6%, 161.8% and 423% can also be used.

    • Fibonacci retracement

    It uses vertical lines to indicate support or resistance. The retracement levels of 38.2%, 50% and 61.8% are the key support and resistance indicators in the financial markets. The retracement is drawn using the high and low points of the chart. These lines help in recognizing the buying and selling momentum in the market. Typically, these retracements are plotted on a daily, weekly and monthly basis.

    • Fibonacci Arcs:

    Arcs can be another way of plotting the support and resistance levels of stocks. This compass-like movement is represented in the form of half circles that intersect the high and low lines at 38.2 percent, 50 percent, and 61.8 percent. When the rally is big, the circle formed is wider. Since it is circular the price of the stock shows similar moves at support and resistance levels. These lines help in anticipating the trading ranges 

    • Fibonacci Fans

    Fibonacci Fans are composed of diagonal lines that are spread within the high and low. After the highs and lows, an invisible horizontal line is drawn from the rightmost point of the chart. These lines are plotted on 38.20 percent, 50 percent, and 61.80 percent retracements. When the stock moves out of these lines, it indicated a strong breakout of a trend. Hence these lines indicate the areas of support and resistance.

    • Fibonacci Time Zones:

    Unlike other methods, Fibonacci Time Zones is a series of vertical lines that analyze the time period when the price momentum was maximum. They are made by dividing the charts into vertical segments that are spaced according to the Fibonacci sequence (1, 1, 2, 3, 5, 8, 13, etc.). Fibonacci Time Zones can span a longer period, more the duration more potent the momentum. The analysis of these time zones can help eradicate the drastic volatility and results in a steady price movement.

    Conclusion:

    The Fibonacci studies in general are not intended to provide you with the entry and exit points in any given trade. The idea behind the use of this ratio is to determine the support and resistance levels of stocks. This ratio helps in making the appropriate buying and selling behaviour of the traders. 

    Golden ratio when combined with other technical indicators, helps in giving a more accurate forecast of the trade. For example: When the Fibonacci ratio is studied in conjunction with the candlestick patterns it can help one determine the right entry and exit points from a medium-term perspective. 

  • cheques

    cheques

    Introduction

    In today’s time, everybody who has a bank account have seen and used cheques and they play an important part whenever you need to transact money from these bank accounts.

    A cheque is a fundamentally important document that an individual, company and others use to withdraw or transfer money. There are various types of cheques available in our banking sector which have different requirements. So, let’s learn more about types of cheques.

    What is a cheque?

    A cheque is a document/paper which orders the bank to transfer money from the bank account of an individual or an organisation to another bank account.

    A cheque is a common form of a negotiable instrument. You need to have a savings bank account or current account in a bank, in order to issue a cheque in your own name or in favour of other parties, thereby ordering the bank to pay the said amount to whoever named in the cheque. It is one of the safest and convenient modes of payment transfers and you can transfer a high-value transaction without any hassle which would be very difficult if hard cash was used instead. This transaction needs to be handled very delicately as it can lead to some serious banking fraud.

    Parties to a cheque

    The parties that are involved with a cheque are:

     Payee: The person named in the cheque who is to receive the payment

     Drawee: The specific bank on which the cheque has been drawn

      Drawer: The person who writes the cheque, who can be the account holder or the customer. The payee and drawer can be the same person.

     Endorser: When the right to take the payment is transferred by the payee to another party, the payee is called an endorser.

    Endorsee: When the right to take the payment is transferred by the payee to another party, the party to which the right is transferred is called the endorsee.

    Features of a cheque

       Cheques can be issued against savings or current accounts

    •       A cheque is always drawn on a specified banker
    •       It is an unconditional order
    •       The payee of a cheque is fixed and certain and cannot be changed
    •       The payment will only be made in the name of the payee/beneficiary
    •       It is an instrument that is payable on demand

    ·        A cheque will be considered invalid if does not contain the date

    Types of cheques

    Open cheque

    An open cheque is a kind of leaf that a bank account holder can use to order the bank to make a payment to another party or deposit in his very own account.

    Bearer cheque

    In a bearer cheque, the money is made to a person who’s appearing on behalf of the payee/beneficiary, in whose name the cheque has been issued. In the leaf, it is a must to include the word ‘bearer’  in this kind of cheque.

    Self-Cheques

    A self-cheque is a cheque drawn in one’s very own call, because of this that the drawer and the payee are the same. You might write the word ‘’self’’  in the area for the drawee’s call at the cheque. It can simplest be encashed in the drawer’s financial institution. A self-cheque is to be used in conditions while you need to withdraw cash out of your very own account. It must be considered if one of these cheque falls in incorrect hands, it could be misused by any man or woman to withdraw cash from the financial institution from which the cheque is issued, so a self-cheque ought to be stored safely.

    Account Payee Cheques

    An account payee cheque is a bearer’s cheque that has the words ‘’account payee’’ written at the top left-hand side, within parallel lines, and crossed twice. This is also called a ‘’crossed cheque’’. It is the most secure way to issue a cheque as the amount written can be transferred only to that specific person’s account.

    Post-dated cheque

    A post-dated cheque is an account payee or crossed cheque that has a future date with a purpose to meet a financial obligation in future. It is legitimate for up to a few months from the date of the cheque’s issuance.

    Banker’s cheque

    Banker’s cheques are cheques which are issued by the bank so it guarantees payment.

    Traveler’s Cheque

    A traveler’s cheque is used when travelling as it is difficult to carry cash and coins and it is a more secure way. It may be encashed while travelling overseas wherein overseas forex is required.

    Stale Cheque

    A cheque in India is valid for 3 months from the date of issue. Any cheque which has been deposited three months after the date of the cheque being signed becomes a stale cheque.

    Blank Cheque

    A cheque which has all the fields blank except for the drawer’s signature, then it is called a blank cheque.

    Various parts of the cheque

    One needs to understand the different elements of the cheque to make sure that the cheque is written correctly. Here are some of the essential parts of the cheque-

    1.   Name of the bank is also called the drawee bank or payee bank
    2.  If there is a crossing on it and written a/c payee only, it is a directive to the bank to pay in the account of payee only.
    3.     In the pay section, you need to mention the name of the payee for whom you are making the cheque. Make sure that the name is spelt correctly. It is advised to draw a line on the space after writing the payee’s name so that no changes can be made.
    4.     In the date section, mention the date on which you want the money to be debited or transferred.
    5.     You should always cross the or bearer option so that if the cheque is stolen, it cannot be paid.
    6.     Mention the amount in words here and draw a line after it is mentioned. Write the amount close to the bank. Also, ensure that the amount written in words and numbers are the same as if they do not match then the cheque can return.
    7.     Make sure to write the amount in numbers and to draw a line after the amount so no one can make changes.
    8.     Do your authorised signature as a drawer.
    9.     Every cheque has a different serial number. It is called Cheque Number.
    10. Account number of the cheque issue is mentioned here.
    11. MICR code is the Magnetic Link Character Recognition Code. It indicates the bank and branch from where the cheque is issued.
    12. 12.  These two digits are the transaction ID.

    Conclusion

    Cheques are one of the most convenient and easy ways to transfer money. There are various types of cheques that can be useful to withdraw money from your bank account as and when required. 

  • The Popularism of NFTs

    The Popularism of NFTs

    We live in a world where every aspect of our daily life, be it education, shopping, meetings, and of course, playing games, etc. is shifting online. Hence, it was only a matter of time before ‘creative’ expression would also transition to the virtual world. Well, the blockchain art market is up and running – zooming, in fact. It has taken the world by quite a storm. There are a maddening number of people across the world who are investing in ‘digital art’ through the process of tokenization. These tokens are referred to as NFTs or Non-Fungible Tokens.

    However, this is not as simple as it sounds. Though NFTs have been grabbing media headlines left and right for quite some time now, many critics are doubtful of the ‘art’ underlying these NFTs. Art like, digital avatars of penguins, cats, apes, and the likes currently dominate a major share of the NFT market.

    On the other hand, many artists and consumer brands have also launched their ‘limited collection’ NFTs. They are selling digital files of their work for millions of dollars on the blockchain. It seems that NFTs are the way forward for the concept of revenue generation in the world.

    What really is an NFT?

    As mentioned earlier, NFT stands for Non-Fungible Token. Non-fungible refers to something which is unique and cannot be duplicated. NFTs represent such one-of-a-kind digital assets, like songs, drawings, stickers, etc. They are cryptographic tokens hosted on a blockchain. Typically, NFTs were hosted only by Ethereum, but other cryptos like Solana have also joined the bandwagon, and many others are also working towards the same. These NFTs attract investors or rather ‘collectors’ for the same reason a Van Gogh painting does – because there is only one of them.

    But this is where lines start getting a little bit blurry. Because, in essence, you can copy and download a digital file as many times as you want. And you can do the same for the art underlying an NFT.

    Well then, why are people spending millions of dollars buying an NFT? This is because buying an NFT gives an investor something that can’t be copied – ownership of the work. But the artist can still claim copyright and reproduction rights, just like with physical art. It’s a one-of-a-kind trading card. For instance, we have Pokémon cards – wherein you can only exchange one card for another, or buy it off someone for a higher price. The same goes on with NFTs, and the original artist gets a royalty every time his NFT art swaps hands.

    Many feel that NFTs could become like art collecting. Grimes sold a 50-second video last year for $39 million. Another artist, Beeple (an American digital artist) auctioned off one of his works at Christie’s for $69 million. This is $15 million more than what an original Monet painting fetched, back in 2014.

    NFT Communities

    Just like in any other commodity trading, NFTs have also started having their own, dedicated communities. The first such community, called CryptoPunks, was founded in 2017. It is a series of 10,000 pixelated characters, each worth millions of dollars. This paved the way for the next community – the Bored Apes Yacht Club – a group of 10,000 cartoon apes. Each of these cartoon apes now sells for an average of $45,000. The latest community to jump on the train is the ‘Pudgy Penguins’. This community hosts a collection of 8,888 unique penguins with different combinations of clothing, facial expressions, and accessories.

    Community NFTs typically entitle buyers to exclusive benefits, like membership of a Discord server, or access to a private Telegram channel, where you can socialize with other fellow buyers. The biggest perk, however, is being able to flex your NFT as a digital avatar on your Twitter profile picture. Plus you get to be a part of an elite crowd.

    NFTs are quickly becoming a status symbol, especially community NFTs. This is primarily because they offer social standing and connections to buyers, along with a potentially profitable investment.

    Buying and Selling NFTs

    Dealing with NFTs is nothing complex. There are many NFT marketplaces now, where you can register yourself and buy or sell NFTs. OpenSea is the oldest NFT market and the most popular one. If you’re an artist and wish to list your NFTs, you can upload your artwork on this marketplace, ‘mint’ it to your profile, and list it for sale. You will also need a crypto wallet compatible with the blockchain you are using.

    The minting process is as simple as uploading your files, inputting your work’s description, making your profile, determining your royalty fees, and completing the listing. Every time the NFT changes hand, you will earn a royalty. So, if and when, your work becomes popular, you will also receive some of its benefits.

    Just like in cryptocurrency, to buy an NFT, what you need is a digital wallet to store your investment. Ethereum is the most widely accepted crypto in the NFT world. NFTs can also work as speculative assets. That is, you buy them with the hopes of selling them in the future for a higher price.

    NFTs are here to stay!

    Brands across all sectors are entering the NFT space. And they are not doing so just to be a part of the trend. NFTs can enable brands to increase their revenue opportunities by a manifold. From celebrities to startups, everyone is coming up with their category of NFTs. Brands like Coca-Cola, Marvel Comics, McDonald’s and Gucci are not just selling NFTs, but auctioning them off.

    In India, popular celebrities like Amitabh Bachchan, Ritviz, Sunny Leone, Sonu Nigam, Nucleya, Yuvraj Singh, have launched their own NFTs in 2021. In fact, T-Series, which is Asia’s largest music label, is also foraying into the NFT market. Initially, they will launch digital arts for popular movies, in collaboration with Hungama, which is developing its own metaverse of entertainment. All in all, NFTs are the future of commodity trading. And all these brands venturing into the Web 3.0 space are making this a reality.