What Is Finance?

Finance is a broad term that describes activities associated with banking, leverage or debt, credit, capital markets, money, and investments. Basically, finance represents money management and the process of acquiring needed funds. Finance also encompasses the oversight, creation, and study of money, banking, credit, investments, assets, and liabilities that make up financial systems.

The time value of money is one of the most fundamental theories in finance. It states that a dollar today is worth more than a dollar in the future.

Many of the basic concepts in finance originate from micro and macroeconomic theories. One of the most fundamental theories is the time value of money, which essentially states that a dollar today is worth more than a dollar in the future.

Since individuals, businesses, and government entities all need funding to operate, the finance field includes three main sub-categories: personal finance, corporate finance, and public (government) finance.

Personal Finance

Financial planning involves analyzing the current financial position of individuals to formulate strategies for future needs within financial constraints. Personal finance is specific to every individual’s situation and activity; therefore, financial strategies depend largely on the person’s earnings, living requirements, goals, and desires.

For example, individuals must save for retirement, which requires saving or investing enough money during their working lives to fund their long-term plans. This type of financial management decision falls under personal finance.

Personal finance includes the purchasing of financial products such as credit cards, insurance, mortgages, and various types of investments. Banking is also considered a component of personal finance including checking and savings accounts and online or mobile payment services like PayPal and Venmo.

Corporate Finance

Corporate finance refers to the financial activities related to running a corporation, usually with a division or department set up to oversee the financial activities.

For example, a large company may have to decide whether to raise additional funds through a bond issue or stock offering. Investment banks may advise the firm on such considerations and help them market the securities.

Startups may receive capital from angel investors or venture capitalists in exchange for a percentage of ownership. If a company thrives and decides to go public, it will issue shares on a stock exchange through an initial public offering (IPO) to raise cash.

In other cases, a company might be trying to budget their capital and decide which projects to finance and which to put on hold in order to grow the company. These types of decisions fall under corporate finance.

Key Takeaways

• Finance encompasses banking, leverage or debt, credit, capital markets, money, investments, and the creation and oversight of financial systems.
• Basic financial concepts are based on micro and macroeconomic theories.
• The finance field includes three main sub-categories: personal finance, corporate finance, and public (government) finance.

Public Finance

Public finance includes tax, spending, budgeting, and debt issuance policies that affect how a government pays for the services it provides to the public.

The federal government helps prevent market failure by overseeing the allocation of resources, distribution of income, and economic stability. Regular funding is secured mostly through taxation. Borrowing from banks, insurance companies, and other nations also help finance government spending.

In addition to managing money in day-to-day operations, a government body also has social and fiscal responsibilities. A government is expected to ensure adequate social programs for its tax-paying citizens and to maintain a stable economy so that people can save and their money will be safe.

Source