What is Finance? And How Does it Involve The Management of Money?
Wrapping your head around the term “finance” can be a daunting task considering it is a broad field. But by definition, finance is basically a term for describing all the processes involved in the management of money.
Money, as a commodity of exchange, has to be managed through various complex processes.
Activities like the use of credit cards, lending, borrowing, and budgeting, all encompass financial activities.
Finance can be classified into three major types which include: public, corporate, and personal finance. The three areas are distinct by virtue of how money is managed in each room.
Grasping The Concept of Finance
“Finance” as defined earlier logically describes how cash is managed as it flows in different areas within the economy.
Public Finance
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| Public Finance | Image by rawpixel.com on Freepik |
Public finance is majorly concerned with all the governmental activities involving the management of money.
Taxation systems, spending by governments, debt acquiring and repayment, and financial bodies, are just examples of these processes.
Public finance is an important area of finance as it encompasses the management of public funds and expenditure policies.
Through taxation, the government raises revenue to finance several sectors including infrastructure, education, healthcare, defense, and even social welfare programs.
Budgeting facilitates the allocation of funds to ensure the smooth running of various entities within the country.
Corporate finance
Corporate finance’s primary focus is on businesses of any type. Different from public finance, it involves managing a business’s cash flow processes.
Therefore, it addresses issues dealing with a business’s revenues, profit and loss, debts, assets, and liabilities.
Personal Finance
Personal finance’s aim focus is on how individuals are managing their personal financial lives. It can extend to family or household level.
Personal finance addresses issues of budgeting, mortgage, personal savings, and even early retirement plans.
Financial Markets: What Are They? And How Do They Assist in Finance?
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| Financial Markets |
Whatever goes on in finance is broad and complex. This brings up the need to have systems to assist in the overall processes.
Platforms where financial instruments such as currencies, bonds, and commodities are sold are known as Financial Markets.
The function of these markets is to provide an easy and seamless way for companies to raise capital for business. On the other hand, investors also have an opportunity to trade financial assets.
Do They Have a Physical Location?
Financial markets can exist in two ways: physical and electronic. At physical financial markets, buyers and sellers physically meet to trade.
A good example is the stock exchanges. On the other hand, buyers and sellers may need no physical meetups to trade assets.
A good example is the Forge Markets which allows investors and institutional firms to sign up and invest in private companies.
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| Forge Markets | Source - forgeglobal.com |
What Influences The Price of Financial Instruments?
As stated earlier, financial instruments include stocks, bonds, currencies, and commodities which are traded in various financial markets.
The prices of these commodities are not always constant - in fact, the prices fluctuate from time to time, and here is why.
The supply and demand of these commodities eventually determine their prices. Factors like economic conditions, political events, and investor opinions influence the demand and supply.
Financial markets play a huge role in the economy. By allowing the flow of capital and enabling businesses to access funding, growth and expansion are achieved.
Financial Regulation
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| The Federal Reserve (Financial Regulator) | Source - Federalreserve.gov |
Financial systems facilitate exchanges between various groups of people including lenders and borrowers.
The system includes banks and investment firms all of which drive economic activities within a nation.
Financial regulation is a necessary step first for the protection of customers and two, ensuring the safety of the financial system.
Depending on the industry, regulatory bodies are quite distinct. In the U.S., individual states rely on the Federal Reserve, the Office of the Controller of Currency, and the Federal Deposit Insurance Corporation for financial regulation.
These are federal bodies protecting both buyers and sellers in the U.S. financial system. Other industries rely on other agencies for regulation.
How Does The Federal Reserve Achieve Financial Protection?
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| Financial Protection | Source - Image by jcomp on Freepik |
The Federal Reserve is one of the regulatory bodies in the central system of banking in the U.S. It has a number of responsibilities to achieve financial protection including:
Monitoring and regulating financial institutions such as banks. This ensures the safety and Genuity of the banking system; the rights of customers are, therefore, protected.
Stabilizing the financial system.
Providing financial services to the government and institutions.
Building and maintaining the monetary policy and credit conditions in the economy.
Who Is in Need of Financial Knowledge?
Ideally, everyone requires financial education and knowledge. Whatever industry a person may be in, getting equipped with expertise in finance will bring forth the best benefits.
Having a grasp of financial concepts such as budgeting, saving, investing, and debt management can help individuals make sound decisions when their money is involved.
With financial knowledge, achieving security and financial stability is very much possible. Therefore, improving the quality of life can be a goal not far beyond reach.
Financial Terms and Definitions
Are you interested in learning more about finance?
The following is a list of key terms commonly used in the finance field:
Commercial bank: An entity that provides financial services to individuals and businesses; commercial banks provide a variety of financial products and services, including savings accounts, checking accounts, and certificates of deposit.
Credit union: A financial entity similar to a commercial bank that is owned by its members.[7]
Depository institution: A financial entity, such as a bank or credit union, that accepts individual deposits and pays interest on those deposits.[8]
Financial system: The network of financial entities that facilitates exchanges between lenders and borrowers.[9]
Investment banking: A form of banking that is "related to the creation of capital for other companies, governments, and other entities. Investment banks underwrite new debt and equity securities for all types of corporations, aid in the sale of securities, and help to facilitate mergers and acquisitions, reorganizations and broker trades for both institutions and private investors."[10]
Security: A security "represents an ownership position in a publicly traded corporation (stock), a creditor relationship with a governmental body or a corporation (bond), or rights to ownership as represented by an option."[11]
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