An Overview of Finance
Finance is a broad term for various things regarding the financial management, formation, and measurement of loans and other investments. In particular, it refers to the questions of why and how an individual, firm or government get the funds required for their investment ventures-sometimes called capital within the business context. It also covers the activities of individuals, firms and governments engaged in buying, selling, trading, and lending the money that they need for the purpose of finance. The word has other various meanings in common use. For instance, in accounting, finance is the method of measurement, analysis, and presentation of financial information, especially as regards the financial reports of a firm.
For example, in banking, finance refers to the managerial decision making associated with credit risk, interest rate risk, borrower risk and financial liquidity. In the financial industry such as trading and investing, finance refers to the activities related to creating, buying, selling, trading, insuring, and financing financial instruments such as equities, derivatives, bonds, money market instruments, swaps, and mortgage debt. The field of investment banking focuses on the creation and management of financial products that are primarily long term and are not readily susceptible to short term market fluctuations. Finally, in financial risk management, the discipline of studying, evaluating, monitoring, and providing management solutions to manage the financial risks associated with publicly traded securities and derivatives.
Within banking, finance considers the processes and procedures by which bank loans and other forms of financial transactions are authorized, made and maintained. This can be applied broadly to all areas of the money management process, from the borrowing of capital to the repayment of such capital. It also covers insurance, the retail and wholesale distribution of goods and services, government finance, international finance, mergers and acquisitions, ownership and investment, business banking, investment banking, the interbank market, risk management, and financial regulations.
As regards the techniques for financial planning and its implications, there are five basic approaches to take into account in assessing the financial prospects. These are micro-economic criteria, asset allocation, credit risk, savings and funding, and liquidity. Micro-economic criteria include such questions as: what is the supply and demand for a given product or service? Is price growth likely to continue?, how much of the product will be consumed in production?, and what effect will the technological changes have on demand? Other relevant criteria for measuring a company’s capacity to meet customer demand include the elasticity of demand, the concentration of production, and the profitability of sales.
Each of these questions requires a different solution. The major function of finance is to provide monetary assistance to businesses in achieving their goals through optimal utilization of financial resources. At the same time, the industry also represents a significant influence over economic policy, since it influences the decision-making process in the central government and the regulation of banks and other financial institutions. As part of the corporate sector, finance contributes to the overall performance of the economy by providing funds for consumption, creating investment opportunities, ensuring appropriate allocation of resources, and promoting economic development.
Finance has three main areas of specialization. One may look into the financial markets, one into financial systems, and one into the economic system as a whole. Thus, the field of Finance includes the study of business cycles, economic policies, and monetary systems. The variety of Finance research involves both short-term and long-term aspects and covers areas like: public finance, macroeconomics, the social sciences, and the natural sciences.