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This article has multiple issues. Please help improve the article or discuss these issues on the talk page.
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Financial Markets | |
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Market Participants | |
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Corporate finance | |
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Personal finance | |
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Banks and Banking | |
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Financial regulation | |
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History of finance | |
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Finance studies and addresses the ways in which individuals, businesses, and organizations raise, allocate, and use monetary resources over time, taking into account the risks entailed in their projects. The term "finance" may thus incorporate any of the following:
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The activity of finance is the application of a set of techniques that individuals and organizations (entities) use to manage their money, particularly the differences between income and expenditure and the risks of their investments.
An entity whose income exceeds its expenditure can lend or invest the excess income. On the other hand, an entity whose income is less than its expenditure can raise capital by borrowing or selling equity claims, decreasing its expenses, or increasing its income. The lender can find a borrower, a financial intermediary, such as a bank or buy notes or bonds in the bond market. The lender receives interest, the borrower pays a higher interest than the lender receives, and the financial intermediary pockets the difference.
A bank aggregates the activities of many borrowers and lenders. A bank accepts deposits from lenders, on which it pays the interest. The bank then lends these deposits to borrowers. Banks allow borrowers and lenders, of different sizes, to coordinate their activity. Banks are thus compensators of money flows in space.
A specific example of corporate finance is the sale of stock by a company to institutional investors like investment banks, who in turn generally sell it to the public. The stock gives whoever owns it part ownership in that company. If you buy one share of XYZ Inc, and they have 100 shares outstanding (held by investors), you are 1/100 owner of that company. Of course, in return for the stock, the company receives cash, which it uses to expand its business in a process called "equity financing". Equity financing mixed with the sale of bonds (or any other debt financing) is called the company\'s capital structure.
Finance is used by individuals (personal finance), by governments (public finance), by businesses (corporate finance), as well as by a wide variety of organizations including schools and non-profit organizations. In general, the goals of each of the above activities are achieved through the use of appropriate financial instruments, with consideration to their institutional setting.
Finance is one of the most important aspects of business management. Without proper financial planning a new enterprise is unlikely to be successful. Managing money (a liquid asset) is essential to ensure a secure future, both for the individual and an organization.
Questions in personal finance revolve around
Personal financial decisions may involve paying for education, financing durable goods such as real estate and cars, buying insurance, e.g. health and property insurance, investing and saving for retirement.
Personal financial decisions may also involve paying for a loan.
Managerial or corporate finance is the task of providing the funds for a corporation\'s activities. For small business, this is referred to as SME finance. It generally involves balancing risk and profitability, while attempting to maximize an entity\'s wealth and the value of its stock.
Long term funds are provided by ownership equity and long-term credit, often in the form of bonds. The balance between these forms the company\'s capital structure. Short-term funding or working capital is mostly provided by banks extending a line of credit.
Another business decision concerning finance is investment, or fund management. An investment is an acquisition of an asset in the hope that it will maintain or increase its value. In investment management -- in choosing a portfolio -- one has to decide what, how much and when to invest. To do this, a company must:
Financial management is duplicate with the financial function of the Accounting profession. However, financial accounting is more concerned with the reporting of historical financial information, while the financial decision is directed toward the future of the firm.
Capital, in the financial sense, is the money which gives the business the power to buy goods to be used in the production of other goods or the offering of a service.
This is capital which the business borrows from institutions or people, and includes debentures:
This is capital that owners of a business (shareholders and partners, for example) provide:
This is money which is used to purchase assets that will remain permanently in the business and help it to make a profit.
This is money which is used to buy stock, pay expenses and finance credit.
This concerns fixed asset requirements for the next five years and how these will be financed.
Working capital requirements of a business should be monitored at all times to ensure that there are sufficient funds available to meet short-term expenses.
Credit gives the customer the opportunity to buy goods and services, and pay for them at a later date.
This refers to the purchase of stock at the right time, at the right price and in the right quantities.
There are several advantages to the stockpiling, the following are some of the examples:
There are several disadvantages to the stockpiling, the following are some of the examples:
This refers to the number of times per year that the average level of stock is sold. It may be worked out by dividing the cost price of goods sold by the cost price of the average stock level.
Depreciation is the decrease in the value of an asset due to wear and tear or obsolescence. It is calculated yearly to ensure realistic book values for assets.
Insurance is the undertaking of one party to indemnify another, in exchange for a premium, against a certain eventuality.
There is currently a move towards converging and consolidating Finance provisions into shared services within an organization. Rather than an organization having a number of separate Finance departments performing the same tasks from different locations a more centralized version can be created.
Country, state, county, city or municipality finance is called public finance. It is concerned with
Financial economics is the branch of economics studying the interrelation of financial variables, such as prices, interest rates and shares, as opposed to those concerning the real economy. Financial economics concentrates on influences of real economic variables on financial ones, in contrast to pure finance.
It studies:
Financial Econometrics is the branch of Financial Economics that uses econometric techniques to parameterise the relationships.
Financial mathematics is a main branch of applied mathematics concerned with the financial markets. Financial mathematics is the study of financial data with the tools of mathematics, mainly statistics. Such data can be movements of securities—stocks and bonds etc.—and their relations. Another large subfield is insurance mathematics.
Experimental finance aims to establish different market settings and environments to observe experimentally and provide a lens through which science can analyze agents\' behavior and the resulting characteristics of trading flows, information diffusion and aggregation, price setting mechanisms, and returns processes. Researchers in experimental finance can study to what extent existing financial economics theory makes valid predictions, and attempt to discover new principles on which such theory can be extended. Research may proceed by conducting trading simulations or by establishing and studying the behaviour of people in artificial competitive market-like settings.
Quantitative Behavioral Finance is a new discipline that uses mathematical and statistical methodology to understand behavioral biases in conjunction with valuation. Some of this endeavor has been lead by Gunduz Caginalp (Professor of Mathematics and Editor of Journal of Behavioral Finance during 2001-2004) and collaborators including Vernon Smith (2002 Nobel Laureate in Economics), David Porter, Don Balenovich, Vladimira Ilieva, Ahmet Duran, Huseyin Merdan). Studies by Jeff Madura, Ray Sturm and others have demonstrated significant behavioral effects in stocks and exchange traded funds.
The research can be grouped into the following areas:
1. Empirical studies that demonstrate significant deviations from classical theories.
2. Modeling using the concepts of behavioral effects together with the non-classical assumption of the finiteness of assets.
3. Forecasting based on these methods.
4. Studies of experimental asset markets and use of models to forecast experiments.
There are several related professional qualifications in finance, that can lead to the field:
Look up Finance in
Wiktionary, the free dictionary.
This article is licensed under the GNU Free Documentation License. It uses material from Wikipedia
