- Time Value of Money
Definition: Money today is worth more than the same amount in the future due to inflation and the opportunity cost of not having the money now.
Example: ₹1,000 today invested at a 5% annual interest rate will grow to ₹1,050 in a year, whereas ₹1,000 received a year later has missed that opportunity.
- Return on Investment (ROI)
Definition: Measures the profitability of an investment as a percentage of the cost.
Formula: ROI = [(Final Value - Initial Value) / Initial Value] × 100.
Example: If you invest ₹1,000 and receive ₹1,200, your ROI is 20%.
- Leverage
Definition: Using borrowed funds (debt) to finance investments or operations, aiming to generate higher returns.
Example: A company borrows ₹5 million to expand operations. If profits exceed the cost of debt, leverage enhances returns.
- Cost of Capital
Definition: The minimum return a company must generate to satisfy its investors, including costs of debt and equity.
Example: If a company’s cost of capital is 10%, any new project must generate at least a 10% return to be viable.
- Liquidity
Definition: The ability to convert an asset into cash quickly without losing value.
Example: Cash is highly liquid, while real estate is less liquid because it takes time to sell.
- Cash Flow
Definition: Tracks the inflow and outflow of cash in a business, reflecting financial health.
Example: Positive cash flow means the business generates more cash than it spends, useful for expansion or debt repayment.
- Valuation
Definition: Determines the economic value of an asset, business, or investment based on methodologies and market factors.
Example: A business valued at ₹10 million is considered worth that amount based on assets, revenue, and potential.
- Net Worth
Definition: The difference between total assets and liabilities, indicating financial position or wealth.
Example: If your assets total ₹5 million and liabilities are ₹3 million, your net worth is ₹2 million.
- Behavioral Finance
Definition: Studies how psychological biases and emotions affect financial decisions.
Example: Fear of loss may lead investors to sell stocks during market downturns, even if holding might be more beneficial.
- Derivatives
Definition: Financial contracts deriving value from underlying assets like commodities, stocks, or currencies.
Example: A futures contract to buy gold at ₹50,000 in six months regardless of market price then.
These concepts form the foundation of financial literacy and are widely applied in personal and corporate finance.
