Finance Explained for Beginners

3 Fundamentals of Finance Explained for Beginners by Kavan Choksi

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Finance is a scientific specialty that deals with how money is managed. It is a broad-spectrum specialty that discusses personal finances, corporate finances, and also public finance, which we will further discuss in detail. In fact, finance is an overly complex topic that is not so easy to understand

Kavan Choksi on different types of finances

Finance is a complicated subject with its variance, but Kavan Choksi explains that the fundamentals of all types of finances are the same and simple. Further, we will discuss the major principles of finances as explained by Choksi in light of the time value of money, risks, and returns, and the opportunity cost.

1. Time value of money

Time value of money is the concept that the value of your money in hand today is far more than the value of money tomorrow. This is the reason we have a chance to invest the money and earn interest over it. Say, for example, if you have money worth $100 now, you may invest in a bank account and earn 5% interest to get the return as $105 after a year. Money’s time value is another important principle of finance as it may affect everything from your personal finances to corporate fund management.

2. Risk and returns 

The fundamental rule of finance is that any investor who puts in the money receives a higher return on adopting riskier investments in terms of risks and returns. We can simply say that an investor who is putting money into a company with a higher risk of bankruptcy expects a higher return otherwise. On the other hand, someone putting money into a company with a lesser risk of bankruptcy can expect only a lower return. This approach is summarized as the greater the risk, the greater the rewards.

3. Opportunity cost

Opportunity cost is the potential profit lost while you choose an alternative over another. This concept is used as a reminder to check for all alternatives before making an investment decision. Say, for example, if you have $10,000 in hand and choose to invest it in a product that will offer you 5% returns. If you chose another investment that would have generated 7% returns, then there is a flat 2% difference, the opportunity cost or the profit loss you had by choosing the first option. In fact, the opportunity cost may not always be necessarily related to money only. It may also be the alternative uses of time or other valuables in various contexts.

Opportunity cost is usually applied to expenses of utilizing funds rather than investing it until later. Some common sayings about opportunity costs are like go on your vacation now or save it for investing in your house. Go to college and earn a better return after your college degree on getting a job.

By understanding these three fundamentals of financials, you can better plan and manage your funds and earn a stable return on investments overtime to secure your financial future. Kavan Choksi explains that the fundamentals are the same for all, and you should always be mindful about your finances to manage them better and build wealth.

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