How the level of financial literacy affects investment efficiency

YEREVAN, April 12. /ARKA/. A decent financial position is not made up of a large income as such, but of the ability to manage capital, control and increase it.

The knowledge and skills that allow a person to manage money in such a way as to achieve goals is financial literacy. It helps:

- correctly evaluate one's income and expenses
- monitor the balance of funds and prevent spending from becoming prevalent
- avoid negative scenarios related to your financial situation: irrecoverable losses, bankruptcy, etc.
- understand how money works and what market mechanisms affect it 
- handle unforeseen situations
 - protect yourself from fraudsters
 - find information and stay informed about economic events
 - clearly articulate your goals and plan how to achieve them
 - know about ways to earn additional income and choose the right one.

Financial literacy affects not only capital building, but also overall life attitudes because you:

 - feel secure, unafraid to make plans and move forward.
 - develop discipline.
 - increase your own self-esteem and status in the eyes of others.
 - transform problems and crisis situations into new opportunities.



Financially literate people take a serious approach to organizing everyday processes: 

- make a budget, knowing exactly the sources of income, items of expenditure and the amount of funds; 
- are conscious about consumption and purchases: make lists for shopping, keep track of prices and subscriptions, avoid impulse spending, plan gifts;
 - benefit from banking products (cashback, credit cards, bonuses), discounts in stores and delivery services.

In addition, the ability to save money and multiply it, to create a safety cushion, i.e. a cash reserve that can be accessed in case of an unforeseen situation; to protect savings from the effects of inflation; to have several sources of income is also developed.

Decent capital, covering not only basic needs, is formed not from restrictions, but from additional opportunities. One of them, with the right approach leading to stable and large profits, is investing. For a person who follows the principles of financial literacy, the lack of experience in this area will not be a major hindering factor. The main thing is not to substitute discretion with belief in frightening myths and, depending on the goals, to determine an individual plan.

A competent potential investor is able to clearly formulate the desired result, understanding exactly what he wants to achieve and within what period of time. Next, it is necessary to navigate through the instruments, assess their potential profitability and analyze one's own capabilities. This requires knowledge of economics or at least a desire to understand the topic.



We will not go into the calculations, but say that simple formulas make it possible to compare the profitability of deposits under different conditions, find out the minimum profitability of production, take into account the impact of inflation, etc.  With the right request, information and examples can be quickly found in open sources.

Financial literacy allows one to understand that when choosing assets it is important to analyze, among other things, the issuer's performance. Consciousness of approach shows the difference in the degree of investor's preparation, even if we are talking about inexperienced market participants. Persons accustomed to assessing the situation will familiarize themselves with the company's ratings on the websites of exchanges and regulators, look at the indicators in documents and current quotes of securities.

With sufficient knowledge of finance, an investor does not confuse the types of trading platforms. This is important because stock, commodity and currency exchanges operate differently. Transactions with futures and options take place on the futures market. There is a separate forex marketplace. Each has its own rules, advantages and pitfalls.

A thoughtful approach to portfolio building also implies that you assess the riskiness of different instruments and realize your readiness for it. An investor who does not understand the basic principles of the market faces a number of threats. For example, he or she may succumb to the fear of losses and limit himself or herself to choosing one, the most conservative, asset. Because of this, the total return on portfolio decreases and the principle of diversification is not observed. This only increases the risks.

It may happen that the investor will not take into account the linear relationship between the potential return and the probability of loss in the pursuit of quick money and will invest indiscriminately in the most unreliable assets, following artificially created trends in the market and will make large transactions without understanding the mechanisms.  

And may even refuse to invest at all, because he does not know about the variety of opportunities and methods to reduce risk.
An investor should decide not only what and from whom to buy, but also how to enter the market. To do this, it is necessary to choose a brokerage company, and financial literacy also helps. Willingness to show personal responsibility and understand the criteria will help to find a reliable licensed intermediary with favorable conditions.



A person who is not used to searching for information, reading and making basic preparatory calculations is likely to follow the simplest path: they will turn to the first company they come across, follow advertising recommendations or the advice of acquaintances, not always professionals. This may result in unnecessary expenses due to high brokerage commissions, and in the worst case - a meeting with fraudsters.

A competent investor, in turn, is characterized by confidence, but by no means excludes risks, but seeks to predict them and learn about the mechanisms that protect market participants. It is rational to ask: "What rights do I have? What organizations ensure their inviolability? What happens if an issuer or trading venue fails to fulfill its obligations?" Knowledge of economics, finance and investment provides the answer.
Responsible and sound decisions come from preparation. By developing financial literacy, you acquire the habit of evaluating and planning. Therefore, the process of investing will not seem alien and will eventually become an effective way to earn money.

This material was prepared within the framework of the joint project "The Year of Investing in Oneself" by ARKA, AMI Novosti-Armenia news agencies and Freedom Broker Armenia.

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10:00 04/12/2024