What is Finance?

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When it comes to discussing our money and finances, it is a good idea to have comprehensive knowledge about certain concepts in order to better understand how to manage this aspect of your lives. That is why this article will deal with explaining what is finance and other related terms. To begin with, finance studies how people manage their money and assets across time, under more or less auspicious conditions. An influential factor here is the time value of money, which in theory states that money devalues over time. Thus, a unit of currency today is more valuable then it will be tomorrow.

Finance doesn’t deal with individuals exclusively, but with organizations, institutions and companies as well, which is why explaining what is finance is best done by breaking it into three sub-categories: personal finance, public finance and corporate finance. Personal finance is something every member of society must deal with, and the general concerns of this area are:

  • the protection of family assets and transferring them safely from generation to generation;
  • planning for financial security in case there are economical fluctuations;
  • securing important assets or services that are essential, such as education, medical insurance, life and property insurance;
  • saving for retirement and creating a fund to that effect;

There are also other financial decisions an individual may have to take, like assuming and paying for loans, planning and paying taxes, investing in order to increase wealth, and generally everything to do with managing every financial aspect of one’s life, from the smallest expenses to the more important and unavoidable ones.

Corporate finance, otherwise known as managerial finance, deals with providing funding for the activities of a corporation. This type of finance can sometimes rely on market fluctuations, so it involves taking on risk and profitability, and trying to balance them in order to bring profit to the corporation. This is usually done on the stock market, by buying or selling shares and it is the result of three linked decisions:

  • the investment decision – the management decides which projects are worth investing in and analyzes the chances for profit;
  • the financial decision – this stage involves considering how the investment will be made and who will provide the funding; this can be done through equities by the shareholders, or by the bank which holds the company’s capital, and which can extend a line of credit for short-term investments;
  • the dividend decision – the management has to decide what happens to any extra profit, whether it is divided between the shareholders or kept for future investment or other expenses;

When it comes to learning what is finance one needs a lot of time and patience, especially without any previous knowledge or studies in the matter. Furthermore, corporate finance also deals with fund management, which involves deciding what the company’s portfolio will be and trying to deduce which the best investments would be.

As for public finance, it refers to the finances of a state and that state’s subdivisions such as provinces, counties, regions, or municipalities. It also refers to any public entities or agencies within that state, and its concerns are:

  • identifying what expenses a certain public sector requires;
  • finding sources of funding for those expenses;
  • establishing and managing the budget;
  • providing loans for public projects;

In many parts of the world, certain central banks have strong financial power, which is why they can act as a last resort when the state or country needs a big loan, thus providing the required capital. The capital is the sum of money an individual, a corporation or an agency can dispose of, and the budget decides how that capital will be spent or invested. There are many more aspects to learning what is finance, but these are the main concepts we need to know about in order to better understand how our society functions.

June 2017
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