5 basic principles of finance you should know

Learning the principles of finance is essential for managing personal and business finances, making informed investment decisions and understanding the economy. Here are five basic principles of finance that you should know.

Time value of money

This principle suggests that a dollar received today is worth more than a dollar received in the future due to the potential to earn interest or investment returns. It is the foundation of many financial decisions, including investment strategies and loan repayment plans.

For example, if an investor bought 1 Bitcoin (BTC) for $10,000 in 2017 and held onto it until 2021, when its value reached $50,000, the investor would have earned a return of 400% on their initial investment. This demonstrates the time value of money, as the investor was able to earn a significant return by holding onto their investment over time.

Related: What is the time value of money (TVM)?

Another example of time value of money in the cryptocurrency market is the concept of staking. Some cryptocurrencies, such as Cardano (ADA) and Ether (ETH), allow users to earn interest on their holdings by staking them. In return for this service, stakers earn rewards in the form of more cryptocurrency. This demonstrates the time value of money, as stakers are able to earn a return on their investment over time by holding and using their cryptocurrency.

Diversification

The principle of diversification means to spread your investment portfolio across multiple assets to reduce risk. It is a way to protect your portfolio from the negative impact of any one investment.

Holding both stocks and cryptocurrencies may help an investor diversify their investment portfolio. By distributing the investment among a variety of assets with various risks and returns, this can reduce risk.

For instance, if the stock market declines, the value of the investor’s stocks may go down, while the value of their cryptocurrency may remain the same or even rise. Similar to this, if there is a correction in the cryptocurrency market, the value of the investor’s equities may make up for any losses.

2:) Diversify your portfolio: Don’t put all your eggs in one basket.

Diversification is a key principle of investment that involves spreading your investments across a variety of different assets in order to minimize risk and maximize potential returns. pic.twitter.com/fNhYQKogLa

— Micheal OLATUNDE (@WF_Miczino) January 9, 2023

Risk vs. reward

This principle states that the higher the…