Introduction
Finance Concepts are those terms that helps you in understanding finance figures at broad level.These concepts are basic and essential terms related to finance.
Key Takeaways
• Finance Concepts represent meaning of words or terms used in finance.
• They increase our understanding in finance and help us in understanding basic information.
• Knowledge of these terms help you to manage personal and business finance.
Some Finance Concepts list with description
1. Interest : Interest means the percentage of capital you gain according the interest rate % like if 2% , it means 2$ ( or your currency ) on 100$ . Interest can be monthly or yearly . As Money has time value , if we give our money to someone on interest , it always increases. As we are getting interest , our money keep increasing from the time you start taking interest.If you take loan , you have to pay from whom you have taken the loan money.
Interest is charged by two types , simple interest and compound interest.
Simple interest is taken on principle amount but Compound interest is taken on principle amount + interest . For example, on 10% interest rate simple interest will be 10$ on 100$ monthly or yearly but compound interest will 21% means 21$ on 100$ monthly or yearly.
2. Cash Flow : Cash flow represents the amount of cash is moving in our economy . We can understand it on other way too that how much cash amount is used in current or how much it is moving in our economy.
3. Liquidity : It represents that how fast you can convert an asset , item or investment into cash currency which you can use directly . Liquid money is most trusted medium of buying-selling process because everyone accept it without hesitation.Let's understand it with a example . I go to market for buying grocery item , I gave the vendor a bank cheque , he will hesitate taking it because he have to go bank then turn it into real cash . he won't prefer it , instead he will ask for cash which he can accept directly without any hesitation.
4. Net Worth : The net worth of an individual or business represents the individual's or business' financial worth after subtracting all the liabilities ( like debt ) or what he owe from his total worth.
We can describe net worth in both positive and negative net worth.
Positive net worth represents individual's or business' total assets worth is more than the liabilities .
Negative net worth represents individual's or business' liabilities are more than the total assets.
Positive and negative net worth itself describe that someone's or corporate's financial condition is healthy or not.
5. Inflation : Prices keep hiking over the time. Inflation represents that how much price is hiked from a base year and what is our purchasing power in after the inflation. The prices of goods and sevices keep increasing over time but your purchasing power decreases with the inflation.With inflation your purchasing power keep decreasing without your conscience and money become less powerful than previous year.For example , if I bought a iphone in 2020 in 1000$ but if I want to buy the same iphone in 2026 , I have to pay more than 1000$ to buy it.It means the purchasing power of money is decreased due to inflation.To balance this inflation our monthly income to be increased.
Purchasing Power Parity ( PPP ) is used to determine the purchasing power of a country.
Purchasing Power , Tier-1 > Tier-2 > Tier-3 countries.
6. Money Diversification : Investing money or allocting assets in different - different alternatives like stock market , fixed income investment or in other alternative assets.It helps in reducing ths risk of loss of investment or assets.It helps in manage risk tolerance and may give you more return in future.
7. Asset : Any valuable resource that has a exchange value and resource is owned by an individual or business.Assets can be created by buying that valuable resource and it will have more value in future.
8. Bonds : Bonds are issued to raise funds.Bonds are types of loan issued to company or government.Bond seller is borrower and bond buyer is lender.Ex- Government bonds , municipal bonds etc.
9. Debt : A form of mortgage or bonds that are owed and the center have to pay it in the future.
10. Stocks Market : Buying and selling shares and stocks are major workflows of stock market.Stock market's share price value keep increasing and decreasing.
Stock market can be divided in Bull market and Bear Market. Bull Market shows the stock market share prices are increasing.As it is a healthy condition of economy , it creates a share buyers market.Bear Market shows the stock market share prices are Decreasing and unemployment increases. As bear marked share prices drop , it creates share seller market.
11. Initial Public Offering ( IPO ) : When private company offers shares to investors for the growth of the company , it is initial public offering.
12. Risk Management : By diversification of your assets and investments , financial risk can be reduced. Sometimes like bear market when share priccomforts , its toleration show invested tolerance level and comforts because economic market always keep swinging , so there is no surety of profit or loss.Investors with high income have more financial safety , so they may take higher risks. High tolerant of economic risks , investors invest in high stakes for short term.
Final Thoughts
These basic concepts of finance definitely helps us in understanding the finance at essential level.These concepts and terms help to provide insights to individuals and business.They builds an understanding for how individual or company can manage risks , where and when investing will make them profit.
