Finance is a broad term for various things about the financial management, organization, development, and research of funds and securities. It is an important part of any venture or organization, since it deals with the use of money, its allocation, liabilities, assets, revenues, profits, as well as lending. Financial accounting aims to facilitate the preparation of financial reports that are used to determine the performance and status of a company, provide information to other organizations, investors, tax authorities, and other interested parties, as well as monitor and track past and future performance of finance. In simple terms, finance is the art of working with and managing money, where money is used for purposes such as purchasing assets, paying debts, building structures, repaying loans, and operating the business that employs the money. Finance is affected by a number of factors, including the borrowing decisions of individuals and institutions, government policies, inflation, taxation, reinvestment, and trade.
Although most people have a general idea of what finance means, most do not know how it actually works. There are many theories on the subject, ranging from traditional concepts of supply and demand to more modern financial concepts, like behavioral finance. Modern financial theory generally addresses three major issues: asset pricing, capital budgeting, and investment choices. These are just some of the areas of specialized study in modern financial theory.
Asset Pricing Finance examines how people make investments that yield returns (a positive net value) and assesses the effects of changes in market prices and expectations on the value of these investments over time. The key areas of study are microeconomics, which study the behavior of individual transactions within a firm; macroeconomics, which study the broad economic patterns and behaviors; and social economics, which studies the behavior of individuals and institutions within a community, state, or country. Behavioral finance looks at how people make investments and use finance in their day-to-day lives. These include everything from savings and investment to borrowing and spending.
Another branch of Finance is the business sector, which uses financial instruments like trading bonds, stocks, and mutual funds. The scope of Business Finance is not as wide as other branches of Finance, but it can be focused on two specific areas of study: banking and non-banking financial activities. Within the banking sector, there are many different types of finance including savings and lending, commercial banking, corporate banking, mortgage banking, international banking, and insurance. Non-banking financial activities include the following: estate management, merchant banking, infrastructure finance, and insurance. All of these areas utilize financial instruments and funding sources similar to those found in banking.
Public Finance also refers to governmental organizations such as cities, states, the federal government, and colleges and universities. Public finance generally deals with the costs of governmental services and goods. This includes such things as building and maintenance, utility costs, and interest on public debt. Public finance also encompasses the costs associated with running the government and keeping it functioning. One example of an area of public service that would fall into the realm of public finance would be the delivery of public transportation.
There are many different types of financial services. Some are risk management, hedging, reinsurance, asset management, insurance, investments, venture capital, global economics, foreign exchange, bond investing, private equity, stock market investing, and other areas. All of these have different purposes and different methods of managing risk. Many of these endeavors are complex and require advanced training and knowledge. Finance graduates often go on to become investment bankers, financial advisers, or otherwise become employed in the various fields of finance as they advance their degrees and build a wealth of experience.
As most financial markets are largely controlled by a few large players (stock market companies), they are known as being a leveraged product. This means that the more one has to invest in order to make a profit, the larger the amount of risk they face. In addition to this risk, the fact that leveraged instruments tend to pay off sooner than their underlying securities may also pose a significant problem for an investor. Leverage can be managed through various means including the use of derivatives (exchange traded funds), short sales, derivatives with counterparty, interest rate locking, and other strategies. While there are many different ways to manage leverage, it is important to remember that it is ultimately up to each individual investor to decide how much they will allow to be leveraged.
Finance is one of the more interesting areas in the world of business, because it is so unique. It is often regarded as being mysterious and difficult to understand, but once you are educated in its basic workings, you will find that it is very straightforward and makes for interesting stories and discussions at dinner parties. For those interested in finance as a career or in investments for wealth, there are many books and online sources available. Finance is not only about making investments; it is also about business finance, bank loans, insurance, personal finances, and even real estate development and management. Finance is truly the language of business.