What Is Finance?
Finance is the study of money, assets and liabilities as they flow through an economy. This includes activities like investing, saving, budgeting and borrowing money. Finance also refers to the system of financial markets and institutions that move money in and out of markets such as banking, credit, capital and equity markets.
Individuals, businesses and governments all engage in financial activities to further specific economic goals. A company might use finance to purchase inventory or equipment while individuals engage in these activities by purchasing and selling goods and services through finance, taking out loans for investment funds or even contributing towards retirement plans. Governments too engage in such financial activity through taxes levied and borrowed money in order to balance their budget and meet spending obligations.
Finance has its foundations in science, but is often seen more as an art than science due to the human element involved. People often make irrational financial decisions which throw off traditional models; yet most foundational theories and principles relating to finance are grounded in mathematics and statistics.
Finance has three primary subcategories, namely business finance, personal finance and public finance. Each broad category has developed specific procedures, standards and institutions:
Corporate finance entails managing a business’s asset acquisitions, budgeting expenses, and planning for the company’s future needs. Personal finance refers to family budgeting, investing personal savings and using consumer credit; for instance mortgage loans from commercial banks allow individuals to buy homes while charge accounts and credit cards provide quick payment solutions for short-term purchases.
Accounting forms an integral component of business finance, providing firms with information they need to assess both short and long-term performance while making wise financial decisions.
Finance employs economic theory to predict and explain financial events and trends. While not the sole method, economic theory provides professionals with more informed financial decisions – for instance, microeconomics offers insights into what might occur if certain conditions were fulfilled on either an individual or firm level; a manufacturer might expect their prices being raised will result in reduced demand and consequently decreased revenues.
Financial professionals need more than an understanding of financial data to be successful. Aside from analyzing it, they must also be capable of making prudent decisions when investing or borrowing money, including understanding time value of money concepts as well as risks and rewards assessment. A better grasp on these concepts can help professionals avoid costly errors when making financial decisions.
