beginners guide to understanding finance
What is finance?
It's all about money.
In particular the management of money. This can be personal money, business money or public money.
From a young age we begin to learn the concepts of personal financial management through pocket money. We learn the importance of saving money, we often learn how we have to work to earn that money which is an exchange of time.
As we get older the complexities of finance are increased somewhat with time. Instead of washing dads car for your weekly allowance along with the independnce of adulthood comes the onset of more responsibilities and more financial skills are required.
What is covered?
This is a beginners guide. So we touch briefly on the following subjects.
Links are provided for further reading on all subject matters covered. This page will bring you up to speed and help you to further understand the complexities of finance. This page is an ideal starting point.
Money - What is it?
Money is put quite simply the medium of exchange. It's what we use as an exchange in a transaction. It's not the only medium of exchange for transactions. You may have swapped a book you read for one someone else has read before, therefore that book would have been the medium of exchange but not everyone is going to want your old book. The creation of money in its current form provides us with a means of having a mutual acceptible form of exchange. You can trade your money for a book, for food, for anything, because someone else out there will always want money.
You can always read more about the history of money by clicking the link.
Credit - What is it?
Credit is the process in which one party will give access to resources that the other party requires without having to be paid in full immediately. Whilst there is a saying that money makes the world go round if this were true then credit would be equally as important. Without credit financial institutions and life as we know it would fall into anarchy.
Before credit is given it's logical to make a risk assesment based on the the third parties ability to repay that debt.
Debts - What are they?
If credit is where you one party offers resources without immediate payment then debt is what you are in once you have obtained those resources. The majority of the world as individuals are in some form of debt and most the countries, corporations and businesses. Our assets may outweigh our debts but we are still most often in debt.
To obtain debt we need to have some form of credit worthiness to begin with, we gain good credit rating by paying off our debts in a timely fashion.
How is time a factor in finance?
Time is another detrimental factor of finance. As time passes inflation increases, commodity and portfolio values fluctuate. Watch the short 1 minute video below which explains condenses this subject very well.
Understanding the time value of money
Financial Risk - What is it?
The term 'financial risk,' would be used to describe risk associated with any form of financing, so in itself would be a deep and complex subject that would require at least its own page. Some of the main topics are as follows:
This will sometimes be referred to as default risk and its whereas discussed the creditor makes a decision on whether the prospective debtor can and will pay back the sum owed. Credit risk can and should be taken seriously as it will result in revenue losses from interest received a decrease in cash flow and an increase in collection costs. In business credit policies are formed to deal with deafulters.
In business this relates to the decrease in value of an investment or trading portfolio. The individual factors of which can be attributed to equity, interest, commodity.
This is where the risk lies in the inability to trade quickly enough in order to make a profit.
Banking - What is it?
The system of trading money in which involves safeguarding deposits and making money available for borrows through loans or mortgage. Banking in this form can actually be traced back to the 13th century.
Banks earn money through the interest charged on borrowing money and also pay interest to people who entrust the bank with their money.
Understanding money and banking
Glossary of terms
Trading Portfolio - The trading portfolio comprises those financial instruments which are held to obtain short-term transaction results, to facilitate transactions on behalf of clients or to hedge other positions in the trading portfolio.
Default - A default is when the debtor fails to payback the monies promised to the creditor
My other financial hubs
- Credit Card - The Sinner or Saviour? A brief history and guide behind our little plastic friends.
Merely mentioning the words credit and card in some peoples company can quite easily be met with a look of distain. Opinions can and always will be divided on the whether this 3 inch piece of plastic...