10 Financial concepts you should be familiar with
So, you have served as a competent professional for the past 15 years and you are reasonably business savvy. Now you’re shifting to a new managerial position and you have no idea what a bear market is or what CAPM stands for. No matter how specialised professionals have become over the last decade, it is important for people in any business to be well acquainted with a few vital financial concepts.
An easy one to start with. You should have heard financial experts discussing an organization's net worth or what are the measures you’re taking to ensure your net worth is increasing, they actually mean the difference between your total assets and total amount you owe to your creditors and other stakeholders.
A positive net worth indicates good financial health, whereas negative net worth means your company is at loss.
In generic terms, inflation is the sustained increase in the price of goods and services. One of the main indicators that professionals need to take account of is if their income is rising proportionately with the rises in price of goods and services.
This simple term indicates how accessible your assets are i.e., what monetary value your assets will generate if sold today. Corporations usually need to have a balanced liquidity since creditors can demand their money at anytime, which in turn could increase liability of the banks or corporations.
You must have heard traders and Wall Street experts mouthing such words and you must have questioned your entire university education several times. Well, bull market is simply an indicator of how much the market is currently rising. In other words, how profitable the market is and how are the prices changing.
This is the opposite of bull and indicates that the market is declining. The other takeaways from this include high unemployment, falling share prices of the market and downtrend economy. The market continuously shifts between bull and bear positions, owing to the dynamic nature of the economy.
This is a simple indicator of how aggressive one can go with their investments and indicates how to react to the changes or ups and downs in the economic cycle. It determines the amount of investment professionals make, your earning potential and the value of the assets invested.
Asset allocation and diversification
This is one of the most common terms used by professionals regardless of what sector they work in. Asset allocation determines the number and type of assets people invest in and include in the portfolio.
Diversification counts for the balance of money in the portfolio. This is basically an investment strategy which makes use of the existing assets and analyses the most profitable move for the company, by taking in many other factors into account such as investor's risk tolerance, goals and investment time frame.
While saving money, interest is a good thing. In borrowing, it becomes the opposite. Essentially, a fee paid by credit borrowers for utilising the asset, in most cases, cash.
Compound interest is an important concept of learning for retiring professionals and gives an indicator of yearly earnings. In simple terms, it is the interest on interest and makes the loans or deposits grow a faster rate than simple interest.
Capital Asset Pricing Model (CAPM)
One of the most common terminologies used in business gives an indicator value of money and risk in investing on new assets. This model is mostly used by corporations to describe the relationship between expected returns and risk, used in the pricing of risky securities.
Financial concepts are some of the most commonly used terminologies and principles in businesses-big or small. Whether, you work in the corporate sector or not, you need to keep yourself updated with these concepts.
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