Traditional finance is the monetary system that is already established in our modern world and it helps us to manage our money and make smart investment, so that our money can work for us. It also acts as a backbone and guides all the financial institutions and investors to invest their money strategically. In this article, I will try to unravel the essence of traditional finance and explain its importance in simple terms.
For me, Traditional finance is like a roadmap for understanding the real value of money over time. It teaches us that the money we have today is worth more than money in the future because of things like inflation and potentially help us to earn good ROI. This is simply because the amount of money one have today can be invested and earn returns and thus, making it more valuable than the same amount of money in the future. This concept is very important to understand the value of money over time. It also teaches us that taking risks in investments can lead to greater rewards and also encourages us to diversify our hard earned investments by spreading them across different assets and sectors to reduce risk and getting better returns.
Different Traditional finance sectors
Traditional finance mainly consists of financial institutions like banks, insurance companies and stock exchanges. They play key roles in safeguarding our money, help us to get loans when in need, protecting us against unexpected events like market crash and teaches us about buying and selling of shares efficiently. So, in today's post, We'll try to explore different investment options such as shares or stocks, bonds and mutual funds etc. and also learn how financial experts analyze investments and predict market trends.
Risk and Returns
The next concept is about risk and return on your investment. Traditional finance teaches us that taking risks in investments can lead to greater rewards, but that higher risk comes with the potential for greater losses as well. While traditional finance has its strengths, they are not bulletproof and has it's weak points and limitations on the other hand. Therefore, it's essential to diversify investments across different assets and sectors to reduce risk while getting good profits from them over time.
Some real life examples
Most probably you have heard the tragic incident about the Silicon Valley Bank which collapsed just recently. SVB didn't have enough money available, so it decided to sell some of its bonds at a big loss, which scared away it's investors and customers. It only took 48 hours from the time SVB revealed the sale to when it completely collapsed. Another example for this would be the unforgettable collapse of the Indian Stock market back in 1992 due to a gigantic scam which was carried out by infamous Harshad Mehta along with other bankers and politicians on Bombay Stock Exchange.
Well, If you have got scared with the 2 examples above, let me give you some hope now. Bajaj Finance Ltd. is an old and well reputed finance company in India and on a long term perspective, it experienced a remarkable increase in its share price from 67.3 INR on August 17, 2011, to 6,410.10 INR on August 17, 2021.
To calculate the return percentage, we can use the following formula:
Return Percentage= ((Final Price - Initial Price) / Initial Price) * 100
Using this formula, let's calculate the return percentage for Bajaj Finance Ltd.:
Return Percentage= ((6,410.10 - 67.3) / 67.3) * 100Return Percentage= 9471.73%
With the calculation above, It's pretty clear that Bajaj Finance Ltd. provided a remarkable return of approximately 9471.73% to its investors during the period from August 17, 2011, to August 17, 2021. This exceptional return signifies the insane growth achieved by the company, making it an attractive investment opportunity for its shareholders. Without a doubt, the traditional finance possesses the power to provide great returns if invested strategically and wisely and the above real life case is a great example for it.
Fundamental and Technical analysis
No one can predict the future with absolute certainty but through research and analysis, we can analyze and take educated guesses on certain stocks or financial schemes. Market analysis and valuation are very crucial in traditional finance to help investors make smart investment choices. There are mainly two common approaches that investors use to analysis - fundamental analysis and technical analysis.
Fundamental analysis mainly focuses on understanding an stock's or asset's true value by looking at its financial statements, company performance in past, industry trends at present and past and several other economic factors. It helps us to determine if an asset is undervalued or overvalued and make our decisions accordingly.
On the other hand, Technical analysis studies the historical market data like price movements and trading volume over a short and long time frame. It looks for patterns and trends, pumps and dumps to predict the future price movements of a certain stock, bond or asset.
Both approaches that I talked about above have their own set of strengths and limitations. Fundamental analysis provides a comprehensive view of an asset's worth, but it may not have the power to capture short-term market changes. On the other hand, Technical analysis focuses especially upon market behavior but may overlook important fundamentals. So, it's pretty important to use both of these analysis when you are researching about a certain asset to predict the outcome more efficiently.
In order to get a successful market analysis and valuation, it requires a lot of research and understanding of financial statements and moreover, you also need to keep up with market trends. Only by combining all these elements and approaches that I talked about above can provide a broader perspective of a certain asset and will help you to get good returns on your valuable money.
I hope you enjoyed reading about the basics of traditional investments in this post and I will be very glad if it actually adds any value. Let me know your thoughts about traditional investment in the comments below and I will be seeing you all in my next post.