A. It is very important to manage our financial needs and goals; our daily activities, and plans involve a lot of risks and challenges to success. And success in Finance could mean to earn and not be in debt with less risk and loss possible.
It is part of financial management, where finance and money surround us, and it is very important to manage it, and to know how to spend in the best way to satisfy our needs without falling in debt, also how to generate money from the dollar or any fund we might have.
Money involves risk, and the more earning we look for the more risk we’ll face, and this is the “game” of being rich quickly and stay safe!
The world of finance is too complicated and contains a lot of tricks and tweaks; therefore any investor might take in consideration many factors, and investigate the opportunity from all the corners; Manipulate and calculate, then take the best decision to take it (the opportunity) or leave it.
Sometimes by leaving or dropping an opportunity because it is not profitable is considered a successful or appropriate financial decision. Avoiding the loss is an important decision might be taken.
First let me define some financial terms:
1. Investment: it could be the economical act of purchasing and selling in order to get benefit of the price difference such as: buying products, currencies, stocks or funds.
In other words, it is an asset or item that is purchased with the hope that it will generate income or appreciate in the future. In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or appreciate and be sold at a higher price.
Also it is the building of a factory used to produce goods, and the investment one makes by going to college or university are both examples of investments in the economic sense. In the financial sense investments include the purchase of bonds, stocks or real estate property.
Be sure not to get 'making an investment' and 'speculating' confused. Investing usually involves the creation of wealth whereas speculating is often a zero-sum game; wealth is not created. Although speculators are often making informed decisions, speculation cannot usually be categorized as traditional investing.
2. Financial risk is the amount of chance that is present with any type of financial investment. Typically, the goal is to secure investments that appear to have a low amount of risk since these are more likely to earn a return. Both individual and corporate investors access the degree of risk present before executing an order to buy shares on any investment market.
3. Finance portfolio: With the many types of investment opportunities and assets now available, it is common for institutions and private individuals to hold a variety of different types of investments at one time. A finance portfolio is a collection of investments held by an institution or individual. Owning a portfolio of assets is part of an investment strategy known as diversification. A finance portfolio that is properly diversified will limit the investor’s exposure to loss as a result of market fluctuations.
4. Bonds: a bond is an investment represented as a financial instrument (A paper note) that contains the liability and responsibility of the debtor (The borrower) to pay the mentioned amount plus the interest rate by an agreed due date (maturity date).
For example, $1000 bound (principle amount), with 10% interest rate, will pay the holder $1100 at certain time which is the maturity date.
5. Stocks: It is aninvestment in a company might take the form of buying shares. Equity investments are securities which represent ownership in businesses. This ownership is purchased in the form of shares.
Usually people mean common shares when they refer to "stocks" or the "stock market". A common share is a financial security that gives the holder an ownership claim in a company.
B. Financial Tips you should know:
Here we are talking about the core principal of finance; the present value known as the time value of money (TVM). It is based on the concept that $100 US Dollars (USD) in the present is worth more than having $100 (USD) a year later. This is because someone could currently invest it and have it earning an additional income during the course of the year; also, this is the basis for present value (PV). For example, investing $1,000 USD at a five percent interest rate over the course of one year would become $1050 USD. If the $1,000 USD were received one year from the present date, it would have to be discounted by the five percent interest rate — it would be $952.38 USD, which is determined by the equation $1,000 USD ÷ 1.05. This is what is known as the present value of $1,000 USD at a discount rate of five percent
- Time is money; the value of a dollar today is different than it worth in the future. The interest is the reason; what you can buy with a dollar today, it will cost you more in the future.
- High interest and high risk are simultaneously related; the high interest you seek the high risk you’ll face.
- When investing, the long period you invest the more return you should get; in other words if you are a creditor (lending money to others), so the long term you go with lending the money, the more interest (earning) you should expect.
- When investing, better to have a mix portfolio including different types of investments or financial instruments, in order to diversify and lessen the risk.
- When investing and having many financial options, try to find the investment that covers its cost quickly in shortest time; in other words check the annual net income, or return on Capital. The investment that covers its cost in short period is preferable than the one takes longer to pay off the investment cost.
- Sometimes you confront loss; the best decision to take is going by the decision that cost you less; the best of the worse.
- When you invest, or dealing with any financial instrument, always take the consideration of the inflation rate. Usually inflation depreciates your money value and power. For example, if your investment’s return rate is 15% and inflation is 5%, that means your actual return rate is 10%.
- Risky investments generally pay more than safe ones (except when they fail). Investors demand a higher rate of return for taking greater risks.
- The biggest single determiner of stock prices is earnings.
- Rising interest rates are bad for bonds. When interest goes up the price of bond goes down and vise versa.
In conclusion, dealing with financial situations you should think about time and interest and how to manipulate the money with them. Time and interest (along with other economical factors like demand, prices, offer…etc) two important factors that can generate money or vanish it!