For the students who are making their way through financial studies, they must know the key concepts regarding the course. Nowadays, students have become intolerant towards their bank statements, and they lack management. Even though financial courses teach a lot about how to control money, you still want to know what is essential in real life.
This place is the right meant for you. Here we have described some of the popular concepts that you should remember while going through a Finance course.
Table of Contents
Essential concepts to master in a finance course
Predicting the condition of financial investment is an essential concept for every investor. Prediction is the percentage of a sure thing to happen. A prediction can be the rise in finance or the odds that you will be facing. Financial courses teach you the concepts to predict financial behavior through mathematical and behavioral methods.
But frequent decisions make you more empowered while making predictions. Note one thing that predictions are not entirely correct, but some parts of it can be undoubtedly true. It takes years to become a perfectionist predictor in a particular field.
2. Growth of capital with time
While investing, you should know that the amount of money invested changes after a specific duration. That money may increase in amount, but there is a chance that the money may reduce. There are various terms in the financial course that will teach you this. You should know that the proper management of capital leads to a rise in capital. This too requires the knowledge of prediction.
You should know the terms like present value, future value, compounding, etc. through the course of your studies. These terms give a better understanding of the growth of capital.
3. Assets and liabilities
These are the two most confusing terms in finance and investment. People often get confused about whether a specific thing is an asset or a liability. In the most straightforward manner asset is a thing that brings money to you, and liability is a thing that takes your money. Assume you have money invested in shares that are called assets because they can bring money to you over the invested amount.
Purchasing a thing through EMI is a liability because it takes the money from you. This difference is the most crucial thing that you must get clear to become a better investor.
4. Managing the Risk
Risk is the term that is connected to every financial term. Risk moistly specifies a bad situation; hence people think that risks are always losses. But in the real scenario, Risks are the chances that may lead to failure if you do not manage them efficiently. In financial studies, you are taught several concepts that can help you to minimize the risk.
Even if you get stuck in some risk factor, you should know how to handle it and get out of that. Generally, the greed of more capita leads to the rise of risks, and hence all investments are considered as riskier.
5. Analytical methods and their use
For prediction and analysis, various tools and methods are developed. That is taught in financing students. Concepts like Uniform, Poisson, Binomial, Fibonacci, moving averages, etc. are the terms that are used for analytics of the marketed business. These concepts use the past static data of the market or business records for the prediction of the future.
Students often fail to apply these concepts in real life and make losses. There are only a few analytical data that can is used here; hence it is suggested to make correct decisions.
6. Net worth
Net worth describes the financial condition of your investment or business. You can calculate net worth by subtracting the total assets from the total liabilities. Here liabilities also include the loan, that you need to repay and the holding that is costing you money. A positive figure represents that you are on the safer side and your assets performing well.
Whereas if you get a negative figure, then you may need to change your plans. Students always get an incorrect figure while calculating the net worth because they mistake somewhere in the liabilities column.
7. Capital allocation
Capital allocation specifies where you put your money through investing. Assigning a place for your money is essential for every student to know. The markets in which you have to put in your money will depend on your conditions. That may be how much returns you want and how much risk you can afford. If you want higher returns, you can invest in shares that provide an average return of 7% – 11%.
Also, you can distribute your capital in several sectors to optimize the risk factors. This increases your chance to gain a positive output for the invested money.
8. Mental accounting and interchangeability
Mental accounting deals with the behaviors of persons. For example, people manage their money according to the source of the money. Another mental accounting behavior is that we divide our money for expenditure and sometimes for investment. While investing, there comes the point that depends on the financial condition.
That states that if you have a lot of debt, then there is no sense to save money for investment. And this makes students think about whether to take a risk and invest or first repay the debt before investing money in assets. And this financial condition stops the interchangeability of the money you are having.
9. Sunk cost
The sunk cost is the capital that has been lost by you, and there is no chance that it can be retrieved back. And it is taught that students should not pursue to recover this money by any means. Because in this process, you might lose the current assets. These costs are not recounted to be taken into consideration while deciding on future investments.
This concept confuses the students about when the money should be considered sunk. This is primarily why it’s essential to be aware of the sunk costs thoroughly in financial courses. Such that you don’t do mistakes in real-life situations.
These are the most popular concepts that can puzzle students in their financial studies. All these concepts depend on how the student was performing in financial studies. A resilient student will never doubt such concepts. But these topics can help to have a clear understanding of what is being taught in the books.