Posts Tagged "analogy"

Interest: Think of it as "rent"

Posted by Preet on Jul 31, 2007 | 0 comments

I don’t think many people explain it this way, but it is probably the best analogy I’ve heard. Rent is paying for the “use” of something: like renting a movie, an apartment or house or a car.  You never own the item, but you get to enjoy the use of it for a specified period of time. Interest in the financial world is exactly the same thing, except you are renting money! If you go back to the post that talks about how banks make money on your savings account, you’ll remember that they give you interest, but take your money and give it out in the form of a mortgage at a higher rate of interest.  So they are “renting” the use...

Read More

Risk: Systematic Risk vs Non-Systematic Risk

Posted by Preet on Jul 26, 2007 | 0 comments

This is an advanced level topic – you may want to skip this post if you are just finding your feet with respect to finances! It assumes a basic understanding of portfolio diversification… With respect to any given stock market there are two types of risk (which is another word for variance according to Modern Portfolio Theory): 1) Systematic Risk and 2) Non-Systematic Risk. Systematic risk is the general ebb and flow of the market – kind of like the tendency for all stocks to get dragged down or move up in tandem at the same time to a certain degree.  For example, the 1987 market decline was a Systematic event in that it really didn’t matter...

Read More