Basic Financial Concepts –
You Have To Start Somewhere




Basic financial concepts will help you to contextualize your financial environment. You need to familiarize yourself with financial terms as you start to take more control of your financial security.

You should have some basic insight into the different economic cycles, an understanding of what inflation is and the main types shares.

This insight may just be the catalyst you need for teaching personal finance and greater personal financial freedom and safe investing.


Basic Financial Concepts

Economic Cycles

  • Very simplistically, there are four general phases in an economic cycle: recovery, boom, recession and depression phases.
  • It is important to remember that a country’s economy is also influenced by other global economies, supply and demand and employment fluctuations.
  • In the recovery phase of an economic cycle you will generally see a consistent increase and rise in consumer spending, production output, employment statistics and investment spending.
  • In the boom phase of an economic cycleyou will generally see consistently high levels in consumer spending, production output, employment statistics and investment spending.
  • In the recessionphase of an economic cycle you will generally see consistently falling and decreasing levels in consumer spending, production output, employment statistics and investment spending.
  • And finally, in a depression phase of an economic cycle you will generally see consistently low levels in consumer spending, production output, employment statistics and investment spending.

 

Inflation

  • Inflation will be affected by different economic cycles and it plays an important role in investment choices.
  • Since inflation is a decrease in how much you can buy with your money because the price of goods and services has increased over a period of time, you must always take cognisance of the risk and effect of inflation in your investment and financial planning long term.
  • Inflation can be influenced by the price of local commodity production and by the price one pays for imported goods.


Shares – How They Work

  • An investor can buy an interest in a company shown as a number/volume of shares that they own in a particular company.
  • The volume that you own may allow you to vote or to receive money.
  • You can make money from shares in the form of dividends.
  • If a company grows bigger and does well over time, then the shares of the company will grow over time.
  • (A company can also not do well over time and then you may lose money because the company will not have enough money to pay you any dividends)
  • The value of your shares will go up and if you sell your shares you will make a profit.
  • Ordinary shares allow shareholders to vote and you can get dividends paid out to you.
  • If you own preference shares you have some advantages over people who own ordinary shares.
  • You will get paid your dividends before ordinary shareholders get paid their dividends.
  • You will have very few voting rights and your dividend pay outs are fixed.
  • If the company goes into bankruptcy you can also be paid in company assets first.



Basic financial concepts will help you on your way and show you how to invest in stocks with a beginners guide to investing.


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