Opportunities in Finance
Finance is the science of turning money into more money. It revolves around the concept of the lender and the borrower. The lender is the guy who makes more money than he spends, and finds a way to turn the leftover money into more money. The borrower is the guy who spends more than he makes, and borrows money in order to do so, paying interest in the process. There are winners and losers in this game. Here are four important areas of finance.
The stock market exists for businesses to raise money. Rather than take a loan out of the bank and pay interest, a business would often prefer that investors purchase stock from them. Each share corresponds to a portion of ownership of the business. The prices of shares are driven by supply and demand. When investors expect a company to turn a profit, they buy stocks and the prices rise. When investors expect a company to lose money, they sell stocks before they lose value.
Consumer Viewpoint – Shares always increase in value. If prices drop they will always come back. If you hold onto a share long enough, it will eventually turn a profit. Stock brokers can predict the future of the market.
Street Fables Says – The average value of shares in the market does rise in the long run, but individual shares can plummet in value and never recover. A diverse portfolio increases your likelihood of avoiding this problem. When shares starts plummeting in value, you must sell them. “Loss aversion” is the term used to describe the tendency to hold onto something in the hopes of regaining your losses. This doesn’t always happen. Statistical analysis has demonstrated that those who make it big in the market likely did so out of pure luck, so assessing risk is your most important asset.
These are loans that cover your costs until your next payday. These companies stay in business by charging interest on the loan, meaning that once you receive your paycheck you pay interest on the loan. Interest rates for these loans are much higher than for most loans.
Consumer Viewpoint – The interest rate on a payday loan may be high, but it is best to take out the loan in order to pay off your costs on time.
Street Fables Says – Avoid payday loans like the plague. The interest rates are high enough that they are comparable to the late fees that you would incur if you just paid your bills late. If you must take on debt to pay off a bill, use a credit card. The interest rates are much lower. If you consistently can’t pay your bills on time, seek financial help immediately.
Real Estate Investment
This is the industry in which land and buildings are bought, sold, and developed.
Consumer Viewpoint – Investing in real estate is a surefire way to earn a return.
Street Fables Says – This industry has very low liquidity, meaning that if it starts losing you money, it is very hard to sell. It also requires a deep understanding of cash flow and available capital. Without proper planning, the industry can leave you in massive debt.
Insurance is the exchange of risk for payment. You pay the insurer, they take on your risks. The insurer assesses the risks, determines how much they cost on average, and charges a premium that will pay for these risks, operating costs, and profit.
Consumer Viewpoint – Insurers are unnecessary. The risks are low enough that the premiums are not worth the cost.
Street Fables Says – If you had enough money to pay for any potential risk that you might face, you wouldn’t need to be insured. In reality, if a situation occurs that you are not insured against and you can’t afford, you are placed into debt. The interest on the debt adds up, and you end up paying far more.