Six Principles of Finance

SIX PRINCIPLES OF FINANCE
TIME VALUE OF MONEY
According to one of the principles of finance, money has a time value. It means that the money
we have on hand today is greater than the promise of receiving money of the same amount in the future.
This is because the money we have on hand can be invested at the present time to gain certain interest in
the future. For this reason, banks exist. These banks are there to safe keep the money that we have now.
If we are earning money to save it for a future use, it is best if we put the money in banks for us to have a
little bit more when we claim our money back. We just have to remember that there are some rules and
regulations that we have to take note of when it comes to putting our money in the banks like rules and
policies especially when it comes to the maintaining balance of such accounts.
On a personal note, I myself am earning money for a future use. The money that I have on hand
is allocated to a certain conference I will be attending to on December. If I put the money in the bank, I will
have a little bit more when I reclaim the money from the bank, if I just let the money that I have on hand
stay in my wallet, it will neither increase or decrease on its own without me moving it.
RISK VERSUS RETURN
Risk is the uncertainty about the outcome of an investment in the future. An investment can either
increase or decrease depending on the company we invested on. Risk is the variability of whether your
investment would return to you with a little bit more or your investment might not return to you in any
amount anymore. Usually, people invest on something with expected high return. But when we take risks,
higher returns are possible though still uncertain.
This is the same with the decisions we make in life. When we give higher risks in doing things, we
may gain higher returns. As in my personal case, I risked something when I was in first year. I risked
joining the pageant in CBEM. It was such a great risk for me for I was not ready to be in tropical wear or
to expose my body because I find it still not in the condition for such. But because of the risk that I took, I
can either humiliate myself or it may help me boost my confidence. With this risk, I was able to gain a high
return. I was able to bag the 1 st runner-up place and boost my confidence at the same time. It was such a
risk for me but I gained higher returns because of what I have done.
DIVERSIFICATION OF RISK
As the second principle of finance states, higher returns are expected from taking more risks.
These returns can be diversified if we invest in several assets or securities. For example, if we invest
P1,000 in one company, it can either come back to us with interest or as nothing at all. There are only two
possibilities if this will be the case. But if we invest P500 each on two companies, there are four
possibilities that will arise. This is an example of the diversification of risk.
In a personal setting, for example you have P100. You are hungry and you see the menu of a
restaurant. There is one meal worth P100 that catches your eye but you are not sure if eating that would
be enough for you. Then you see other meals worth P50. If you eat the P100 meal, it’s either you will get
satisfied or not. If you buy two P50 meals, you might be satisfied with both meals, with one of the two
meals or none at all. With the choice of buying the P50 meals, the possibility of satisfaction increases.
FINANCIAL MARKETS ARE EFFICIENT
It is but normal that people nowadays seek to grow more in the financial aspect of life. People
want to become wealthier for them to achieve a better life. For us to know whether our investment will
lead us to achieving this goal, financial markets are useful. Financial markets serve as information center
for it reflects all the information available for the public. Financial markets are always up to date and
reflect information useful to the public.
I really do not know how to relate this principle to my life but perhaps I can compare the financial
market to the television. I just don’t know but both are very informative. The television shows the people
the different advertisements of the products the market has for sale. These advertisements are like the
information shown by the financial markets. Information given by financial markets are facts and not just
opinions and most of the advertisements on television are also facts so I can compare them in such a
way. If I see that the product shown during commercial breaks are effective as shown by the
advertisements, then I will invest my money in buying such products in the hope of getting the benefits
they have claimed.
MANAGEMENT VERSUS OWNER OBJECTIVES
The fifth principle tells us that the objectives of the manager and the owner may differ. For this to
be compensated, managers are usually given a portion of the ownership of the company. This way, the
manager’s and the owners’ objectives will meet halfway. This is usually true to big companies wherein the
owner is not the manager of the said company.
This also happens in our life especially in the different organizations that we join in. Let the owner
be the adviser of the organization and the manager is the president. The objectives and the ideas of the
two may differ. In such cases, the president of the organization is given such power to act as an owner of
the organization that he or she is given the power to decide on the activities of the organization in
coordination with the adviser.
REPUTATION MATTERS
Reputation matters! This is simple yet striking principle of finance. An individual’s reputation
reflects his or her ethical behavior. This is the way an individual or an organization treats others legally,
faithfully and honestly. For companies to be successful, they must have the trust and support of their
customers, employees and owners. This perhaps is the simplest explanation of this principle. Reputation
is important to a company if they want to be the best in their field.
Reputation is also important to all of us. This will help us gain more people in our life and be
trusted in the things that we do. We should walk the talk and should always be true to the people around
us. If we say we’ll be there for someone, we should do our very best for that person. We should never do
anything to damage our reputation and most of all, to damage the reputation of others.
BICOL UNIVERSITY
COLLEGE OF BUSINESS, ECONOMICS AND MANAGEMENT
DARAGA, ALBAY
SIX PRINCIPLES
OF FINANCE
Submitted by:
Jason Carmona
BSBA Financial Management III
Submitted to:
Prof. Francis G. Ng, CPA
FM 32 Professor

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SIX PRINCIPLES OF FINANCE

TIME VALUE OF MONEY

RISK VERSUS RETURN

MANAGEMENT VERSUS OWNER OBJECTIVES

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