Finance involves management of money or capital in a business to ensure effective utilization. Principles of finance act as a recommendation for investing and making a financial decision. These principles are useful for individuals who want to invest in their future. I will use the principles of finance which include the diversity of investment, risk and reward, and time value of money principle, to invest in my future.
The principle of diversification of investment talks about looking for different ways to distribute your investment. An investor is advised to risk over several businesses instead of investing in one business. This is because, diversity in business will enable reduce the risks and increase the investor’s income. For example, if an investor only invests in buying and selling of oil, their investments will be fully affected in case of a shortage in supply of the oil in the marketplace. However, if they distribute their investment portfolio to have shops, a salon and a royal hotel, the extra income will make them stable. This is because the risk has been distributed across all the other businesses and not in one business. A portfolio is a set of possessions of an investor like property titles, stocks, bonds and currencies. Additionally, one can look for ideas in which they can make their talents be an investment opportunity. The income acquired will supplement the income from other businesses.
Delegate your assignment to our experts and they will do the rest.
Risk and reward principle suggests that the greater the risk, the higher the reward. It explains that having a great-risk business investment will be a waste of resources if the reward from the business was small. Therefore, the more the investment risk, the better the reward should be. It is referred to as a risk return trade-off. A risk return trade-off is where a greater investment is associated with a higher return rate. Investors cannot be assured of a hundred percent profit because no one knows the future. Investments like bonds and stocks often have a great risk rate and thus, a higher return rate. Others with low return rates and risks include certificates of deposits and money making accounts. However, secured bonds are low risk investments because they are always backed by possessions like cars and houses that the investor owns in case they default on the loan. The investor therefore will not lose their achievements.
Lastly is the principle of time value of money investment. It suggests that the value of money accrues with time. That the worthiness of money is more in the present than in the future. This is mostly because of inflation. Inflation is the increase in prices of goods over time. Therefore, an investor should put their money to work and invest so as to make more money. However, when using time value of money principle in investing, an investor should consider a certain amount of risk even though the profits from the investment will cut out the risks. For example, if I get $10,000 now and I invest it at an interest rate of ten percent, then in a year, I will have earned a thousand dollars, having used the money I got.
Among the three principles, diversification of investment is one principle that I find effective for me to use to invest in my future. Having a diverse business portfolio has proved to stabilize the investor’s life. This is because, apart from the full income from the main business, extra income from other investments will channel in. Therefore, in case the main business experiences low production levels, I will still benefit from the other investments. Additionally, diversification will enable minimize the investment risk. I will achieve this by taking on risky and risk-free investments so that the overall risk becomes lower. Also, if I use my talent to generate money as my other business, it will not be strenuous because it is out of passion. Additionally, I can develop another career from it.
The most challenging of the three principles of finance is the principle of risk and reward. One disadvantage of using this principle is that the return from the business investment is not certain. You can have a good business idea but its success is not guaranteed, especially in the first years of investment. This is because some conditions in the market can change and one can encounter unexpected expenses that may affect the sales even if the business is going well. This may cause the return of the business to be lower than the risk. Therefore, risk and reward principle can only be used by investors who invest in long-term, but not short-term business. Also, taking a great risk requires a lot of financial risk. Therefore, one might opt to go into debts to start a business and substantial financial loss can be accrued if the business does not go well. Too many debts can limit the interest income of the business thus, it will take years for the investor to get full profit from the business.
In summary, based on the principles of finance, I would invest in my business using three ways; the risk and reward, diversity and time value of money principles. Diversification of investment principle is one effective way that I feel most confident to invest in my future because of the extra income acquired from other businesses and also the low risk rate accrued in the businesses. The risk and reward principle is the most challenging because the outcome of the investment is always uncertain.
