The financial volatility of a currency, the inflation of a product, the public debt are terms we often hear on television and in the newspapers, but what do they mean? Do they affect us and in what way?
The current market dynamics, in particular, due to the pandemic period, have given us a greater awareness on the part of ordinary citizens, consumers, and investors, how much the world of the global financial market can affect our daily lives and unexpected events, and what the consequences can be. In particular, the costs and debts of public spending, the management of savings and investments, choices that make us richer and poorer. Unfortunately, many economic choices reflect a lack of financial education and culture, especially in some countries with a high level of financial knowledge. It is common to entrust our savings to different funds (state funds, private funds, and corporate funds) without knowing the type of fund and the risks involved, and we only realize this after we have suffered financial losses due to irrational or emotionally driven choices, without knowing in depth the opportunities and future prospects of the markets.
Knowledge gives us the ability (and therefore the power) to understand, manage and anticipate complex phenomena that would otherwise threaten to disrupt our lives. This is particularly the case when it comes to managing our finances.
The Why, The Rules, and The Causes
According to the OECD (Organisation for Economic Co-operation and Development) definition presented in 2012, financial education is a process through which consumers, savers, and investors improve their understanding of financial products and the concepts behind them and through instruction, information, advice develop attitudes and knowledge to understand the risks and opportunities of making informed choices, where to get support or help to make those choices and what to do to improve their status and level of protection.
Financial education, therefore, aims to give greater knowledge and awareness to the various users involved (young people and adults) about the considerable, different, and modern financial instruments, some of which are emerging and little known (e.g. Blockchain currencies). In general, the financial instruments that daily move towards the encounter between supply and demand, are mainly of a share and bond nature, with a different and autonomous benchmark value (values from 1 to 7), so as to be able to use them efficiently and mitigate the possible presence of risks such as capital losses caused by losses, drawing personal and collective benefits with the right expectations and with the virtues of prudence and awareness. We need only think of the temporal evolution of the contractual relationship between creditor and debtor and the evolution of the instruments supporting these exchange transactions: from the primitive market rules with the exchange of an asset for another object to the historical evolution of money and the consequent guarantees and safeguards, right up to the use of digital money.
In order to operate in the market, for everyone to agree, the actors involved must operate coherently by establishing rules and limits, with a commitment to respect them, preferably with a central and impartial authority organizing and supervising the activity so that the agreements made are respected. This may seem obvious, but it is not. The obligation on the part of the person making the offer is to ensure that the goods are in demand, that they are to be sold and that the object does not have a direct or indirect purpose, that the users are honest and professional, that they comply with what has been agreed and that they undertake, once they have been paid, to transfer what has been agreed (in time and in the manner). On the other hand, the obligation of those who purchase a good or use a service is to assume the burden of paying in the agreed time and manner. The good or service changes evolve, is involved in events that make its value change for the purchaser (one day it costs $1, tomorrow $2).
Over the years, the financial system has changed from bringing users together to exchange material goods to dealing with immaterial goods, but what really influences the market, as we are now seeing, are emotions and information. In fact, for many years now, even the conception of the financial system and the market has evolved, the markets or commonly known as the so-called "Squares", which when they open their values are influenced by what happens outside the market (eg. a political event such as the American lessons, the tax impositions by the USA on cryptocurrencies etc...), a market and users who are guided by their emotions and the behavioral statuses that surround us, in particular the value that investors give to information about that particular asset and the future benefits connected to it.
However, there is some advice that economists have given on several occasions:
- Diversifying one's investments in order to minimize losses
- Don't rely on instruments with quick and easy returns
- Observing market behavior and choices over a long period of time
- The Dow Theory
- The market is cyclical (it has periods of decline and others of rising).
- Waiting
- Assess the offer and how reliable the person making the offer can be.
- Inform yourself correctly
- Knowledge of one's own financial risk
- Define the objectives of your choices
Risks
However, attention must be paid to the risks associated with the use of these instruments, as mentioned above, not only to fears of economic losses but to a whole series of conducts, of a criminal nature and using computer tools and complex economic schemes; finalized to the activity of collection and investment (activities which are regulated by specific central authorities, which establish the modalities and sanctions) where, with deception and deceit, the users are deceived by introducing large quantities of money into illicit markets, so as to give the criminal organizations the possibility of generating illicit proceeds of money and which subsequently end up in the circuits of "clean" money (money laundering). In fact, the European police force, Europol, states in some of its analyses that the main weakness of many investors is that they have been deceived because of elements such as trust, the common work (the herd effect, so do they all), the fear of losing the opportunity of the moment, emotionalism, the fascination for risk and the attraction to easy and apparently risk-free gain. Risks that unfortunately find a reality, as in the collection of some of the most common financial deceptions listed below: the Ponzi scheme, Boiler Room frauds, the well-known Money Mule system. Illicit conduct could easily be avoided thanks to good and basic financial knowledge.