Essential Financial Concepts and Economic Principles

Money and Financial Systems

Barter: Goods or services are exchanged without the use of cash.

Types of Money

• Goods: Physical items used as currency.
• Coins and Paper: Traditional physical currency.
• Fiat Money: Currency that does not have intrinsic value (dinero fiduciario).
• Bitcoin: A decentralized digital currency.

Functions of Money

• Medium of exchange.
• Standard of value.
• Extremely liquid store of wealth.

Banking and Credit Terms

Collateral: An asset that a lender accepts as security for a loan.

CDO (Collateralized Debt Obligation): A complex structured financial product.

CDS (Credit Default Swap): A financial derivative that allows an investor to swap or offset their credit risk with that of another investor.

Redeemable Money: Currency that can be exchanged for a particular sum of money or goods of equivalent value.

Leverage: An investment strategy of using borrowed money to increase the potential return of an investment.

Credit Card: A card that allows you to borrow money against a pre-approved line of credit.

Debit Card: A card that draws money directly from your checking account at the time of purchase.

Reserve Ratio: The portion of reservable liabilities that commercial banks must hold, rather than lend out or invest.

Mortgage Loan: A product that provides the necessary capital to buy or rehabilitate a home or other property (hipoteca).

Economic Sectors and Budgeting

Three Main Sectors of the Economy: Companies, government, and households.

Company Budget

Formula: Income – Expenses = Profit

• Income: Sales of products, rentals, interest, etc.
• Expenses: Goods purchased or manufactured, marketing, accounting, etc.

Government Budget

• Income: Payments from economic units, taxes (VAT, duties), and personal income tax (PIT).
• Expenses: Subsidies to economic units, media subsidies, family benefits, and debt services.

Budget in the Red: A budget is in the red when it has a negative balance and fails to meet its objectives.

Taxation and Financial Statements

Goal of Taxation: To finance state expenditure, regulate consumption, and stimulate savings.

PIT (Personal Income Tax): Tax paid on personal income, distinct from taxes paid on firm earnings.

P&L (Profit and Loss Statement): A financial statement that summarizes the revenues, costs, and expenses incurred during a specified period.

SMEs: Small and medium-sized enterprises.

Cash Flow (CF)

The net amount of cash and cash equivalents being transferred into and out of a business.

Objectives: To maximize operating cash flow, free cash flow, and overall financial efficiency.

Utility Companies: Activities carried out by state agencies or under state regulation, designed to meet the needs of a community.

Investment Terms

Venture Capitalist: A private equity investor that provides capital to companies with high growth potential in exchange for an equity stake (capitalista de riesgo).