Financial Principles

Financial principles consist of a set of fundamental opinions that form the basis for financial theory and financial decision making namely:

a. Principles of Self interest behavior
This principle says "people act in their own financial self interest". The essence of this principle is that people will choose the actions that provide the best (financially) benefits for themselves.

b. The principle of Risk aversion
This principle says "when all else is equal, people prefer higher return and lower risk". The essence of this principle is that people will choose alternatives with low profit and return ratios.

c. Principles of Diversification
This principle says "diversification is beneficial" This principle teaches that diversification is beneficial because it can increase the ratio between profit and risk.

 d. The principle of Two sided transactions
This principle says "each financial transaction has at least two sides". this principle reminds us that in studying and making financial decisions we not only look at our side, but also try to look at the opposite side of our transactions.

e. The principle of Incremental benefit
This principle says "financial decisions are based on incremental benefits" This principle teaches that financial decisions must be based on the difference between value with an alternative and the value without the alternative. Incremental benefits are additional benefits that must be compared with incremental costs or additional costs.

f. Principle of Signating
This principle says "action convey information" This principle teaches that every action contains information.

g. Capital market efficiency principle
This principle says 'capital market are efficient' capital market or an efficient capital market is the capital market where the prices of financial assets being traded reflect all existing information and adjust quickly to new information. For the capital market to be information-efficient, the capital market must be operationally efficient, for example the ease of buying and selling securities.

h. The principle of risk return trade of
This principle says 'there is a trade off between risk and return'. People like high profits with low risk (the principle of risk aversion). The condition of high return, low risk, this will not be achieved because everyone wants it (the principle of self interest behavior). This principle says if you want large profits, be prepared to bear a large risk or high risk, high return.

i. Option Principle
This principle says option is valuable, option or option is a right without obligation to do something. The principle of this option is the basis for developing derivative security (derivative security) options that are useful for hedging (risk reduction measures). Besides that, the option principle helps a lot in analyzing and understanding financial decision making.

j. The principle of Time value of money
This principle says 'time has a time value', this principle teaches that money Rp
The 1,000 we receive today is not the same as the 1,000 rupiah we received in the next year. Many people are not aware of the implications of compound growth or compound value on financial decisions.