I am delighted to welcome you all to a new segment at Trinity Business Review, Trinance. This segment aims to introduce you to global markets and the general world of finance. Whether it is your first time reading about finance or you are a more seasoned reader, I am sure you will gain new insights you had not known previously.
Trinance will explore recent market trends and career opportunities as well as including student, alumni, and recruiter commentary. Finance is a bit odd in the sense that it tends to have a lot of acronyms and many words for the same thing, but you will soon come to tell which ones are the same. To make matters easier, I have compiled a list of five financial terms you should know and additional resources to help you keep up with the markets.
1. Time Value of Money
This concept means that a lump sum amount of money is worth more now than at a later point in the future. This is because said money has the opportunity to grow until you reach that point later in the future, as opposed to receiving the same lump sum later.
Of course, money can only grow through investing which will compound over time, which leads us to our next term.
This process occurs when an investment’s appreciation (increase in price) is reinvested again. This appreciation can occur through interest accumulation (say interest earned on a savings account in a bank or other financial instruments). This process can repeat itself an unlimited number of times so it can lead to exponential growth over a sustained period.
Albert Einstein is reported to have said that compound interest is “the eighth wonder of the world”. The idea with compounding is to ensure your investment outpaces inflation which again leads us to our next term quite nicely.
A very topical macroeconomic indicator right now, inflation is the increase in prices observed across the economy; this decreases the purchasing power of local currency at a specific moment in time. Most developed countries’ central banks set an inflation target of 2% per annum, including the European Central Bank, the Federal Reserve (U.S. Central Bank), the Bank of England and the Bank of Japan.
However, inflation is not as bad as it sounds and is actually healthy for the economic growth. Very low or negative inflation (deflation) would lead to consumers buying less because they anticipate falling prices, which make businesses earn less, which in turn may end up dismissing employees or cutting salaries to make up for these losses. All of this can lead to an alarming series of events very quickly as seen in the Great Depression of the 1930s and most recently in the Global Financial Crisis of 2008-09. A small but steady increase in inflation causes the opposite of the deflationary effects mentioned above and keeps the economy ticking.
A sum of borrowed capital due to be repaid before a specific point in time. Regular interest repayments are also expected to be paid before the principal (lump sum borrowed) is paid back. Debt can be taken out by people, businesses and countries so these types of debt differ greatly.
Many companies like to take out debt because it is tax-deductible. This means that it can ask the relevant tax authority for a tax deduction for that fiscal year because it has been responsible in repaying the interest on that debt. However, too much debt can also quickly spiral out of control; for example, Hertz, a car rental company, filed for bankruptcy in 2020 due to their inability to pay back debt worth $19 billion. It has managed to restructure its debt since then, but not every company who goes bankrupt due to excessive debt is that lucky.
Equity is the capital that belongs to the company’s owners and would be given to them if all the assets and debts were sold and repaid, respectively. This would occur if the company went into bankruptcy and had to be liquidated to be sold off to its debtors and creditors.
In accounting, this is equal to total assets minus total liabilities on the balance sheet. This capital is used for financing activities such as investing in a new research and development (R&D) project or purchasing new assets. Retained earnings (profits kept back from the previous accounting period) is another component of equity that may be used for future operations or to pay dividends to shareholders (company owners).
Resources for Further Learning
There are many fantastic resources to keep up with finance and as a Trinity student you get access to some of the world’s best financial journalism. The Financial Times and The Economist are free to read for Trinity students so you can log on to Stella Search to read The Economist and sign up to TCD’s FT license here.
- FT News Briefing: fantastic summary of business news (10 minutes at most)
- Numbers by Barrons: interesting markets recap by numbers (5 minutes at most)
- The Economist Morning Briefing: current affairs round up (5 minutes at most)
- Trinity SMF Podcast: great interviews with business leaders organised by Trinity’s very own SMF (1 hour at most)
- Bloomberg Five Things You Need to Know to Start Your Day: daily morning setup
- Bloomberg The Weekly Fix: the bond market
- FT Unhedged: recent market trends
- FT Due Diligence: mergers and acquisitions
- FT Moral Money: sustainable investing
2022 FTxBocconi Talent Challenge
I would also recommend applying for the 2022 FTxBocconi Talent Challenge. I took part in the 2021 edition and found it brilliant. It is a fantastic competition that allows you to meet some of the FT’s best journalists and Bocconi’s leading business academics in the FT HQ that I recently had the chance to visit! You can apply here before the 24th November and feel free to get in touch with me with any questions.