- Understand how money works
You need to understand how money works before you start making decisions about how to invest your own money. You should know what interest rates are, what inflation is, and how to calculate compound interest. If you don't have a good understanding of these concepts, then you won't be able to make sound financial decisions.
- Be aware of risk
Risk comes in many forms, including market risk, credit risk, operational risk, liquidity risk, legal risk, political risk, reputation risk, and social risk. Risk management is the process of identifying risks and mitigating them.
- Know the difference between investing and speculating
Investing involves buying shares of companies that you believe will increase in value over time. Speculating involves betting on short-term price movements without any expectation of future gains.
- Learn how to read financial statements
Financial statements provide information about a company's performance and its assets, liabilities, revenues, expenses, and shareholders' equity. Financial statements are prepared using accounting principles that determine how much profit a business makes and whether it has enough cash to cover its debts.
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- Understand the basics of accounting
Accounting is the process of recording transactions and summarizing data to present a picture of a company's finances. Accounting standards are rules set by government regulators that dictate how businesses record their transactions and summarize their data.
- Understand the basics of finance
Finance is the study of how money is created, collected, spent, saved, invested, and repaid. It includes topics like banking, insurance, taxes, and investments.
- Become familiar with basic financial terms
A balance sheet shows a company's assets, liabilities, and ownership structure. A statement of income shows how well a company did financially compared to its goals. A statement of cash flow shows how much money was generated and where it went.
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