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14 Importance of Learning Finance

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14 Importance of Learning Finance

You know finance is not only receiving money from different sources but also proper utilization of money or financial resources. Here utilization means investing money in accordance with risk-taking behavior where the return is maximum. The main objective of financing is to ensure the right amount of money at the right time. For better economic and financial decision making you have to have basic knowledge of finance and financing. Every day we take financial decision although we are not aware of, we are actually doing financing like a corporate finance manager. If you want to take a better financial decision then you must know the core financing principles. Here in this article, I will clarify the 14 importance of learning finance both for the individuals, corporate finance manager, and organization.

14 Importance of Learning Finance

The reason I want to discuss the importance of learning finance is to motivate you to learn finance and apply it in your daily life which will help you to become a better decision maker.

How to Learn Finance and where to learn Finance?

It is not easy to learn finance if you are not aware enough to think it deeply and understand the scenarios and logic behind the financing principles. I personally follow different strategies to learn finance as much as I can. As an individual, you have a lot of scopes to learn finance and it can be:

  1. Academic Learning of Finance
  • You can do graduation or post-graduation in finance and also get a CFA degree if you have passion enough.
  1. Professional Training
  • Institutional Training
  • On the Job Training
  • Online Training Course
  1. Self-Learning
  • Reading Books
  • Study Research Paper, Journal, articles
  • Watch online lectures or tutorials

List of 14 Importance of Learning Finance

The importance of learning finance is given below which are listed from a different perspective. Hopefully, this will add value to your learning phase.

  1. Proper Understanding of Time Value of Money
  2. Take Better Financing Decision
  3. Aware of the Valuation of Financial Resources
  4. Understand the Requirement of Evaluation of Investment Opportunities
  5. Able to Analyze Each and Every Opportunity Cost
  6. Put Your Efforts for Maximization of Wealth
  7. Acquire Maximum Return of Your Investment
  8. Increase Your Analytical Skills
  9. Manage Your Personal and Professional Life in a Better Way
  10. Understand the Requirement of Forming a Portfolio
  11. Deep Analysis of Sources of Fund
  12. Understand the Investors Life Cycle to Choose Right Investment Time
  13. Understand Key Success Factors of Financing
  14. Know How to Get Your Cost of Capital and Analyze it

Take Better Financing Decision

The most important thing is to take a better financing decision as every financing decision both for borrowing and lending is related to cost and benefit. A better financing decision will bring financial success which is expected by every individual.

Proper Understanding of Time Value of Money

If you actually want to know finance then you must know the concept of the time value of money that with the time passes the value of your money is decreased. So, to ensure value maximization you are to invest in a way which increases the net present value of your wealth.

Aware of the Valuation of Financial Resources

As an investor of both money and capital market, please make sure that you do proper valuation otherwise you may lose your valuable financial resources. That’s why every investor needs to be aware of valuation of financial resources or instruments.

The Requirement of Evaluation of Investment Opportunities

The proper understanding of the requirement of evaluation of investment opportunities will induce you to do capital budgeting (NPV, IRR, PBP, MIRR, PI, etc.). Both for long-term and short-term investment opportunities need to be evaluated, especially for long-term investment opportunities.

Able to Analyze Each and Every Opportunity Cost

Every decision whatever we are taking in our daily life we forgo other opportunities, so it is required to do an evaluation of opportunity cost and invest where your opportunity cost is lower. The investment decision is actually dependent on the behavior of investors.

Acquire Maximum Return of Your Investment

You need to learn finance because investors always intention are to ensure maximize their return on their investment. Here, the maximum return will increase the value of your asset.

Put Your Efforts for Maximization of Wealth

A financially sound person always tries to put all of his/her efforts for maximization of wealth. Maximization of wealth will bring more profit for you or for your organization.

Deep Analysis of Sources of Fund

Whenever you plan for the collection of funds you may find several short terms or long-term sources. If you have adequate knowledge of financing then you will be able to do a deep analysis of sources of funds. But one thing is you must know financing concepts and how it works.

Know How to Get Your Cost of Capital and Analyze it

Whatever the amount of capital, is not free of cost. Every capital has cost, so before taking an investment decision you have to calculate and analyze the cost of capital but before that, you must know the finance. That’s why there is huge importance in learning financing.

Understand the Requirement of Forming a Portfolio

After knowing finance properly, you must know what is a portfolio and why we form a portfolio. A portfolio is a set of a different mixture of investment where both risk-free and risky investment is there, the main purpose is to decrease the overall risk of investment. If you learn finance then you must know how to form portfolio both for individuals and organizations.

Manage Your Personal and Professional Life in a Better Way

If you want to become financially sound person then you must know finance and after that, you will be able to manage your personal and professional life in a better way. Your financial strength will be increased by the right financing decision.

Understand the Investors Life Cycle to Choose Right Investment Time

Be aware of an investor life cycle and choose when to invest and when to save your valuable money. Your money is your asset, it is your decision whether you want to grow it by investing it at the right time.

Understand Key Success Factors of Financing

Behind every successful finance manager, a secret is there, the secret is understanding the key success factors and application of the factors at the right time in the right place.

Increase Your Analytical Skills

Ultimately by knowing finance deeply, you will be able to increase your analytical skills. You will be able to take good financing decision which will give you financial freedom, maximize your wealth and increase your spending power.

If you have any confusion about anything related to the importance of learning finance then please let me know, I will try to clarify it further.

Written by

Md. Nahian Mahmud Shaikat

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Determinants of Required Rates of Return

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Required Rates of return is one of the key factors which influence an investment decision. Actually, Determinants of Required Rates of Return helps to calculate the required rates of return on an investment. Sometimes the required rates of return are considered as the cost of capital/expected rates of return which basically used as a discounting or compounding factor. By using this factor, we actually calculate the present and future value of cash flows.

Determinants of Required Rates of Return

Here, determining factors are getting more important because this help to find out what should be our minimum required rates of return on investment. But the question is what are the determinants of required rates of return?

Determinants of Required Rates of Return

There are three broad determinants of Required Rates of Return and these are as follows:

  1. Time Value of Money
  2. Expected Rate of Inflation for a particular economy
  3. Involvement of Risk on Investment

Time Value of Money

  • The present value of money
  • Future value of money

Expected Rate of Inflation (Decline in Purchasing Power of Money)

Every economy may have inflation which is alright up to a considerable percent but exceeding inflation is not good for the economy. At the time of calculating expected rates of return, we must consider inflation. Higher the inflation, higher the required rates of return. It is a central bank and government responsibility to adopt an effective economic policy by which an accepted rate of inflation can be there for an economy. Investment selection process is influenced by the required rate of inflation.

Involvement of Risk with Investment

You know, there is nothing where risk is not involved. And it is money we talk about is more sensitive towards risk. Risk can vary from industry to industry, company to company, person to person. But the common thing is higher the risk higher the rates of return person expect from an investment. Although you may find there is a variation of risk-taking behavior among the individuals which is influenced by the personal trait of an individual. Risk can be broadly categorized into two head; one is systematic and other is an unsystematic risk.

  • Systematic Risk: Directly involved with the system which arises from the macroeconomic factors and it is not possible to minimize this type of risk through diversification of investment.
  • Unsystematic Risk: Unsystematic is a type of risk which is possible to minimize through diversification of investment. With this risk, there is a correlation between risk and diversification.

The determination process is involved with complicated work because the process is depending on how market change over time and how investors behave with it.

Market change because of the following reasons

  • A wide range of available investment alternatives
  • Return on specific assets change dramatically
  • Change in interest rate over the time period

It does not necessarily need to be the same required rates of return for all the people. The rate will vary according to the economic factors and the personal risk-taking behavior of an individual. So it will be better for you if you identify the influencing factors and then calculate your required rates of return on investment.

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What does a Financial Analyst do

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If you have the plan to become a Financial Analyst (FA), then you must know the responsibilities and Functions of Financial Analyst that is to know about what does a financial analyst do. So that you can prepare yourself accordingly. Several times many people ask me what is finance and what does a financial analyst do. For them, I have listed 5 questions with the answer to helping them understand.

  1. Who are the financial analysts (FA)?
  2. What are the responsibilities and functions of an FA? Or what does he do?
  3. Is there any Demand for Analyst?
  4. What are the Educational Qualifications Required to become an analyst?
  5. Why your company should have at least one analyst?

Who are the Financial Analysts?

Financial Analysts are the individuals responsible to do financial analysis. But their responsibilities and functions are not limited to only financial analysis. They do economic analysis, business process analysis, market analysis, and many other things. A person who is involved with the analysis of financial matters is considered as a financial analyst (FA). They are the key to the financial decision-makers and their business decision is based on extensive financial analysis.

What does a Financial Analyst do

What does a Financial Analyst Do?

Answering this question will also answer the question of what are the responsibilities and functions of an FA and how they perform. Actually, financial analysts do

  1. Conduct Financial Analysis
  2. Capital Budgeting and decision making
  3. Ratio Analysis
  4. Identifying Cost of Capital
  5. Determine Optimal Capital Structure
  6. Dividend Policy Analysis
  7. Analysis of Financial Statements
  8. Financial Forecasting
  9. Cost-Benefit Analysis
  10. Portfolio Analysis
  11. Economic Analysis
  12. Market Analysis (Capital Market Analysis)
  13. Business Process Analysis
  14. Conduct a Feasibility Study

Responsibilities and Functions of the Financial Analyst

Conduct Financial Analysis

The main job of a financial analyst is to do financial analysis, where the analyst can work for an individual, company or any other business organization. It is a broad category of analysis where many types of analysis are included. As per the instruction and the requirement of the management, the analyst does their work. As a part of the analytical job, analysts actually do the followings:

Capital Budgeting

Investment opportunities for long-term are analyzed by the financial analyst so that the organization can select the most beneficial investment where NPV, IRR indicates a positive outcome.

Ratio Analysis

Ratio analysis is basically done for evaluating the company’s performance, asset, and liability position. Based on the analysis of financial analyst, top management take required important decision for their organization.

Evaluate Cost of Capital

First calculates the cost of capital and then decide which financing decision is optimal for minimizing the cost of capital. Lower the cost of capital means lower cost of collected funds and which helps to higher the return.

Optimal Capital Structure

An analyst also works for determining what should be the optimal capital structure for a particular company and how they can get the benefit of an optimal amount of capital.

Effective Dividend Policy

An effective dividend policy can improve the company’s financial position and a financial analyst do the required analysis and suggest what type of dividend policy that a company may go for.

Analysis of Financial Statements

You know financial statements are the key statements where we can evaluate both the performance and financial position of a company. It is his responsibility to analyze financial statement and report to the management.

Financial Forecasting

It is one of the core functions and responsibilities of a FA. Because financial forecasting will guide a company where to move in the future. And forecasting basically done with the existing data, so proper analysis of data is done by the financial analyst. An effective and efficient financial analyst work as a key factor in minimizing future loss and maximizing benefits.

Cost-Benefit Analysis

A business always needs to choose from different options. And from the available options, it is FA responsibility to conduct a cost-benefit analysis. From the result of cost-benefit analysis make or buy decision can be made and invest or not invest in a particular sector is also decide.

Portfolio Analysis

If a business is dealing with multiple businesses then he/she needs to analyze all of his/her business and its products so that they can decide which combination will give then minimum risk with maximum return. Analysis of the portfolio is also conducted by the financial analyst because the analyst knows how to analyze a portfolio.

Economic Analysis

Here economic analysis includes both micro and macroeconomic analysis where different factors are continuously monitored and analyzed so that if there is any change in influencing factors then a FA can inform and suggest to take a required decision.

Market Analysis

An analyst also works with market analysis, the reason behind is to monitor market share, competitors situation so that it would be possible to make a strategic move to become successful in a particular industry.

Business Process Analysis

Business process analysis is one of the critical jobs of any person. Although everyone can not analyze business process because here critical thinking and proper understanding are required. I believe that an FA can work for a business process analysis as because he used to involve the key analysis of the business.

Conduct a Feasibility Study

An experienced financial analyst can do the feasibility study for any industry because he has the capabilities, compassion to conduct a comprehensive feasibility study and make a report where all the functions of FA are applicable for doing a feasibility study.

Is there any Demand for Financial Analyst?

Yes, there is a huge demand for financial analyst in different industries. You may find, the demand of financial analyst is most for the investment bank, capital market, financial institution, bank, non-bank financial institutions, etc. that is for company/organization who do a business of money or financial assets, an analyst is must for them. Nowadays every company tries to keep at least one financial analyst for their organization. So there is no question that there is an increase in demand for a financial analyst. Companies recruiting FA because they are helpful for identifying different success factors.

What are the Educational Qualifications Required to become a Financial Analyst?

To become a financial analyst, first of all, you required to have at least one finance degree, it can be graduation. It is not necessary to have post graduation as in your graduation you will have enough scope of learning core concepts of finance and financial analysis. You may find that many people are working as an FA but they do not have any finance degree. They actually do their graduation in a business major in accounting but they have the minimum level of knowledge of financial analysis. But if you have a finance degree then it will give you an extra edge to perform financial analysis efficiently.

Educational Qualifications of Financial Analyst

  1. At least one Bachelor Degree (BBA) concentration in Finance, Finance & Banking, Accounting,
  2. Post Graduation (MBA) Major in Finance (will add value)
  3. CFA – Chartered Financial Analyst (will add value); CFA is the most attractive degree accepted worldwide for the FA
  4. CIMA – Chartered Institute of Management Accountants (will add value)

Why your company should have at least one analyst?

Your company should have at least one analyst because a financial analyst can help you to make the right investment decision. He can help you to do your business in the most cost-effective way which will bring you maximum profit for your company. Every time he will analyze cost-benefit analysis of your business process and business alternatives. You know business is all about making money, so if you want to make a maximum return from your investment and take a right financial decision then you must have a good FA who will guide you all the time and works as a supporting partner of whom you can trust.

Finally, financial analysts do so many things for a company and they are capable of doing. But it is a management choice how they utilize a FA for taking the right decision for their company. The challenging job for the recruiter to recruit best suitable FA from the competitive market.

What does a Financial Analyst do pdf

Written by

Md. Nahian Mahmud Shaikat

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Importance of Capital Budgeting

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First of all, let’s have some discussion about capital budgeting so that you can understand what capital budgeting is and why there is the importance of capital budgeting for financial decision making.

Capital Budgeting

Capital budgeting is the process of evaluating investment alternatives. Here investment alternatives are the long-term investment opportunities available to invest. Caution must be taken when capital budgeting because it is long-term in nature, involvement of a large amount of money, and use of monetary resources.

The Process of Capital Budgeting

At the time of Capital Budgeting, a simple decision-making process is followed by the finance manager. The process is as follows:

  1. Identify available project which may have future prospects.
  2. Calculate the amount of fund required to be invested (Outflow) for different projects
  3. Calculate all expected benefit will receive within the project tenure
  4. Conducting cost-benefit analysis
  5. Compile all the results of the analysis
  6. Evaluate each of the alternatives
  7. For single project selection, select the best one from the alternatives and for multiple projects, select the most beneficial project.
  8. Finally, start with the selected project/ projects to implement.

Importance of Capital Budgeting

Now come to the point why managers give too much emphasis on capital budgeting, actually managers concern about capital budgeting because capital investment can bring both profit and loss. Managers actually want to see whether the project will be beneficial for the company or not. If it is beneficial then the project can be implemented by investing a large amount of money, otherwise not. And the tools help to identify the right project is capital budgeting tools.

Importance of Capital Budgeting

Importance of Capital Budgeting in Corporate Finance

  1. Investment of a Large Amount of Money
  2. Long-Term Investment
  3. The probability of Incurring Enormous Loss
  4. Evaluation of Available Investment Alternatives
  5. Selection of Right Investment
  6. Proper Utilization of Funds

Investment of a Large Amount of Money

A proper analysis must be done before investing a large amount of money because our valuable money may be spent out for the wrong investment. Capital budgeting is one of the popular tools to evaluate investment alternatives to a large amount of money.

Long-Term Investment

In the case of long-term investment, precautions must be taken because from the long-term investment we expect long-term benefit and money will be stuck for a longer period. There is less flexibility of movement of money form long-term investment. That’s why the importance of capital budgeting is increasing day by day.

The probability of Incurring Enormous Loss

You know the future is always uncertain and for a large amount of investment, there is a probability of incurring an enormous amount of loss if you chose a wrong investment opportunity. So, you must do capital budgeting first then chose an investment opportunity where you will get an optimal amount of return.

Evaluation of Available Investment Alternatives

Basically, we do capital budgeting for the purpose of evaluating all available investment alternatives so that we can invest in the right amount in the right place. Remember that before evaluation you must take valid data otherwise you would not get a proper result of the analysis.

Selection of Right Investment

After analyzing all the things related to investment using capital budgeting techniques a corporate finance manager can select the right investment for his firm, which has a good potentiality of bringing benefit for the organization.

Proper Utilization of Fund

As because you choose the right investment for your company, you may assume that you are utilizing the valuable fund of your organization.

The Success of Business Depends on Capital Budgeting

We use different tools of Capital budgeting to make the financial choice for large investment. The process of capital budgeting not only helps us to evaluate but also to choose the right investment. That’s why I personally consider capital budgeting as one of the success factors of the business. Effective analysis will give you proper guidelines for the right investment. And the right investment will generate the best possible revenue for your business, which is the key considerations of the success of your business. That’s why we give importance to capital budgeting for investment decision making.

Written by

Md. Nahian Mahmud Shaikat

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What are the Three Forms of Market Efficiency

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What are the Three Forms of Market Efficiency?

Whenever you talk about you may find three forms of efficiency exists in the market. So, what are the three forms of market efficiency? The answer is:

  1. A weak form of Efficiency
  2. The semi-strong form of Efficiency
  3. A strong form of efficiency

What are the Three Forms of Market Efficiency

Weak Form of Efficiency in the Market

In case of a weak form of efficiency, the current price of securities is fully affected by all the past information in the market, for this reason, you will not get any additional benefit if you work with historical data that is your decision is based on past information. Price should change time to time with the change of previously available information.

Example of Weak form of Efficiency

Suppose the share price of Lanka Bangla Finance rises last seven days but we can not be sure that whether the price of the stock will increase in future or not because the price is already adjusted with the past information.

Semi-Strong Form of Efficiency in the Market

Another capital market hypothesis is a semi-strong form of efficiency, where the current price of securities is fully affected by all past information and all publicly available information. If this form of efficiency exists in the market then you will not get any additional return in case of relying on the past price movement and information came from print or online media.

For testing whether there is a semi-strong form of efficiency exists or not, you can test by two measures; one is checking how past information how it was adjusted with the price changes and the second one is how professional managers were performed in the market for making extra profit. Actually, in this world of capitalism, most of the capital market exists a semi-strong form of efficiency.

Example of Semi-Strong Form of Efficiency

Suppose IDLC finance announce that first week of the next month they will introduce a new financial product. After the announcement, the price of their stock in the market rises sharply. This means publicly available information creates an impact on the price of the stock but there is no influence of insider information. If this is the case then we can say that there is a semi-strong form of efficiency exists in the market.

Strong Form of Efficiency in the Market

In a capital market strong form of efficiency exists when there is a reflection in the price of securities by the all publicly and privately available information. Here publicly information available through news briefing published a journal, research paper, market update or any other. And privately information is inside information can come from the insiders of the organization. But in the real world, there is no market where the strong form of efficiency exists.

Example of Strong Form of Efficiency

Suppose Union Capital is doing well in the financial industry and they officially declare that they will provide dividend at 30% of the par value of their share and also management is thinking that within next few months they will add a new business line with the existing product line. The thing is the information of dividend declaration is publicly available information and the introduction of a new product line is private information which is not yet publicly available. But if a scenario is there where the price of a stock is changed by the all these private and public information and known to the general public then that market will be considered as a strong form of an efficient market.

Difference among weak form, semi-strong and strong form of efficiency

The main difference among different form of market efficiency is the availability of publicly and privately available information and past information (historical data). Because these actually supposed to influence the market price of securities. The main thing is how the market behaves with the addition of new publicly and privately available information related to the market.

Written by

Md. Nahian Mahmud Shaikat