The industry of finance works on trust, so Ethics is one of the most important subjects which one studies in all the three levels of CFA.
Learning finance is about learning the business. So, let’s start a business – say, the business of bananas.
Say, you buy bananas worth INR. 6000. Also, you bought a Cart worth 4000 rupees. All your investments cost Rs. 10,000 out of which Rs. 4000 is in fixed costs and rest is in variable costs. Now suppose you sold your Bananas for Rs. 12000 and gained a profit. You need to report the profit for which you will have to prepare a profit and loss statement which will include your revenue of INR. and Cost of INR. and Profit of INR. 6000.
Where does the INR. 4000 go? It goes to Balance Sheet under Fixed Assets. This asset will be depreciated every year and the depreciation value will go to the Profit and Loss Statement.
So, this is the first finance subject you learn in CFA – Financial Reporting and Analysis (Balance Sheet, Profit and Loss and Cash flow statements).
Now, let suppose you want to expand and start Banana Milk Shake business and for buying mixer you raised a loan of INR. 50000.
Previously, revenue was driven by Sale of Bananas only and now your revenue will go up because the number of revenue driver increased. Revenue will also come from Sale of Banana Shake. As you raised INR. 50000 from debt, this amount goes under Liabilities in the Balance Sheet. You have to pay interest cost on this liability every year. This interest cost will be deducted from your gross profit every year in profit and loss statement. All the things related to debt will be studied under Fixed Income Securities.
Suppose the loan you took was at the rate of 10%, then what % do you need to make from business to sufficiently pay interest and run a business? Greater than 10%? Obviously! This is the main concept of Corporate Finance where they say Internal Rate of Return should be greater than the weighted average cost of capital.
Now say that you expanded your business from bananas to all the fruits.
Revenue drivers increased a lot. What was the effect on the cost drivers? Variable costs like – electricity, employee costs increased, right? So, you had a good contact with the solar manufacturer and installed solar cells for lifelong free electricity. Again you have to raise some money with some cost of capital. By doing this you increased your revenue drivers and decreased your cost drivers, thereby increasing your profitability and value of your business. This will be covered under Equity Valuation.
Now suppose that we expand our business more and want to integrate backward and want to buy land to start cultivating our own fruits.
This process of backward integration is explained under Mergers and Acquisition.
Our business is growing good and cash flows are sufficient to cover all the costs including interest costs. We want to expand further and cater to the premium category. So we started sourcing some of the great quality organic fruits from abroad. Now, the foreign currency will affect your business. This is dealt with in International Finance.
After doing a lot of hard work you earn a lot of money and are searching for good investments. Although you can find a good business by applying the concepts of Business Analysis and Valuation you need to have some information about the capital markets and their working before investing. Investment Analysis and Portfolio Management deals with the details about the capital markets where this banana shake wala will put his money into in hope to multiply it. This subject will club all the things learned and will provide you with a holistic learning experience about the business.
You could invest in stocks and also in bonds. For studying the factors affecting stocks and bonds Business Analysis and Valuation course is important along with the Fixed Income Securities Course which is especially for the knowledge of bonds. One more subject called Alternative Investments will identify other assets in which you might be able to invest in real estate, commodities etc. So, now you can create a diversified portfolio which might say, 40% Stocks 30% Bonds 10% Gold 20% Real Estate.
Along with all the above subjects, the subject which will help you manage several risks to your portfolio is Derivatives – Futures, Options & Risk Management.
Most important subjects over which you will build your knowledge of finance and will be clubbed with finance to have a better understanding are – Quantitative Methods, Microeconomics & Macroeconomics. That’s all, Happy reading. :)