A global economic and financial boom in the 20th and 21st century Essay

A global economic and financial boom in the 20th and 21st century - Essay Example There was a global economic and financial boom in the 20th and 21st century.This resulted in tremendous growth of opportunities for businessmen, investors, governments, financial intermediaries and other financial institutions to invest their money. In other words, they needed to create a portfolio of assets that lead to high returns with assets that do not yield very high returns, but are safe. The major objective behind this investment strategy was to maximize the wealth and at the same time make sure that the investment would not lead to credit risk or risk of default. Before making any investment, investors are required to price the assets clearly. This requires knowledge of financial statement analysis and security analysis. Those investors who lack the financial guile and knowledge suffered in the long-run. Investment analysis is a detailed field of study. It combines theory of financial evaluation with the practical implications. The task is tough, but it is by no means imposs ible. Analysts combine various financial techniques such as NPV, security valuations, IRR and other tools of investment appraisal to evaluate the investment opportunities they have. The investment decision is usually based on the return on investment and safety of investment. However, there is a negative correlation between the two. High yielding assets are usually not very safe. Safe assets usually do not have very high yields. Investors face a dilemma, either to go for riskier assets and earn high rate of return or to go for safe assets at the cost of high rates of return. The final decision is based on the risk appetite of the investors. However, in the modern world, very few investors choose to invest in one kind of asset. Investors usually create portfolios to make sure that their investment is safe and at the same time it earn them sufficient rate of return (Investopedia.com, 2011). The other considerations for making investment decisions include liquidity of the security, obl igations, credit rating, past performance trends and risk mitigation. All of these measures are assessed carefully in order to make rational investment decisions. There are three types of financial statements that are usually used for making the financial decisions. These include balance sheet, profit and loss (income statement) and cash flow statement. These statements give accurate picture of the financial position of the firm along with its financial performance and the liquidity of the firm. Balance sheet consists of three main sections. The firm section gives the picture of the short-term and long-term assets of the firm. These assets enable the firm to earn money in the future. The second part of the balance sheet describes the liabilities of a firm. These represent the long-term and short-term obligations of the company. This money is owed by the firm to its creditors and failure to meet these obligations can result in bankruptcy of the firm. The third part of the balance she et represents the owner’s equity. This part represents the claim on the assets by the owner’s. The second statement used by the financial analysts is the income statement. Income statement usually describes the profitability of the firm. It is calculated by deducting revenues from expenditures. The third statement used by the financial analysts is the cash flow statement. This statement represents the liquidity position of the organization. This statement shows the actual movement of the cash in the organization. Since most of the organizations are using the accrual based accounting system, the profit figure becomes irrelevant without using the cash flow statement. Hence, income statement and cash flow sta