World Library  
Flag as Inappropriate
Email this Article

Money management

Article Id: WHEBN0003225448
Reproduction Date:

Title: Money management  
Author: World Heritage Encyclopedia
Language: English
Subject: Allowance (money), Investment management, Trend following, Activities of daily living, FT Magazine
Collection: Investment
Publisher: World Heritage Encyclopedia
Publication
Date:
 

Money management

Money management the process of managing money which includes investment, budgeting, banking and taxes. It is also called investment management.

Money management is a strategic technique employed at making money yield the highest of interest-yielding value for any amount of it spent. Spending money to satisfy all cravings (regardless of whether or not they are justifiable to be included in budget basket) is a natural human phenomenon. The idea of money management techniques is developed to plummet the amount which individuals, firms and institutions spend on items that add no significant value to their living standards, long-term portfolios and asset-basins. Warren Buffett, in one of his documentaries, admonished prospective investors to embrace his highly esteemed "frugality" ideology. This is the making of every financial transactions to be worth the expense:

1. avoid any snob-appealing expense
2. always go for the most cost-effective alternative (establishing small quality-variance bench-mark, if any)
3. increase expenses more on interest bearing item than any other thing
4. establish the expected benefits of every desired expense using the canon of plus/minus/nil to standard of living value system.

These techniques are investment-boosting and portfolio-multiplying.

Contents

  • Trading & Investment 1
  • Ethical principles 2
  • See also 3
  • References 4
  • Further reading 5
  • External links 6

Trading & Investment

Money management is used in Investment management and deals with the question of how much risk a decision maker should take in situations where uncertainty is present. More precisely what percentage or what part of the decision maker's wealth should be put into risk in order to maximize the decision maker's utility function.[1]

Money management gives practical advice among others for gambling and for stock trading as well.[1]

Money management can mean gaining greater control over outgoings and incomings, both in personal and business perspective. Greater money management can be achieved by establishing budgets and analyzing costs and income etc.

In stock and futures trading, money management plays an important role in every success of a trading system. This is closely related with trading expectancy:

“Expectancy” which is the average amount you can expect to win or lose per dollar at risk. Mathematically:

Expectancy = (Trading system Winning probability * Average Win) – (Trading system losing probability * Average Loss)

So for example even if a trading system has 60% losing probability and only 40% winning of all trades, using money management a trader can set his average win substantially higher compared to his average loss in order to produce a profitable trading system. If he set his average win at around $400 per trade (this can be done using proper exit strategy) and managing/limiting the losses to around $100 per trade; the expectancy is around:

Expectancy = (Trading system Winning probability * Average Win) – (Trading system losing probability * Average Loss) Expectancy = (0.4 x 400) - (0.6 x 100)=$160 - $60 = $100 net average profit per trade (of course commissions are not included in the computations).

Therefore the key to successful money management is maximizing every winning trades and minimizing losses (regardless whether you have winning or losing trading system, such as %Loss probability > %Win probability).[2]

Ethical principles

Ethical or religious principles may be used to determine or guide the way in which money is invested. Christians tend to follow the Biblical scripture. Several religions follow Mosaic law which proscribed the charging of interest. The Quakers forbade involvement in the slave trade and so started the concept of ethical investment.

See also

References

  1. ^ a b Harris, Michael (May 2002). "Facing the facts of risk and money management" (PDF). Trading Strategies ( 
  2. ^  

Further reading

Balsara, Nauzer J. (1992). Money Management Strategies for Futures Traders. Wiley Finance.  

External links

  • [1] The Principles of Money Management in Stock Trading.
  • Directory of active money managers Free screener of global money managers
This article was sourced from Creative Commons Attribution-ShareAlike License; additional terms may apply. World Heritage Encyclopedia content is assembled from numerous content providers, Open Access Publishing, and in compliance with The Fair Access to Science and Technology Research Act (FASTR), Wikimedia Foundation, Inc., Public Library of Science, The Encyclopedia of Life, Open Book Publishers (OBP), PubMed, U.S. National Library of Medicine, National Center for Biotechnology Information, U.S. National Library of Medicine, National Institutes of Health (NIH), U.S. Department of Health & Human Services, and USA.gov, which sources content from all federal, state, local, tribal, and territorial government publication portals (.gov, .mil, .edu). Funding for USA.gov and content contributors is made possible from the U.S. Congress, E-Government Act of 2002.
 
Crowd sourced content that is contributed to World Heritage Encyclopedia is peer reviewed and edited by our editorial staff to ensure quality scholarly research articles.
 
By using this site, you agree to the Terms of Use and Privacy Policy. World Heritage Encyclopedia™ is a registered trademark of the World Public Library Association, a non-profit organization.
 


Copyright © World Library Foundation. All rights reserved. eBooks from Project Gutenberg are sponsored by the World Library Foundation,
a 501c(4) Member's Support Non-Profit Organization, and is NOT affiliated with any governmental agency or department.