Finance is a broad term that encompasses banking, leverage or debt, credit, capital markets, money, and investments. Finance, in its most basic form, denotes money management and the process of acquiring required funds. Finance also includes the management, creation, and analysis of money, banking, credit, investments, assets, and liabilities, which comprise financial systems.
Many fundamental concepts in finance are derived from microeconomic and macroeconomic theories. One of the most basic theories is the time value of money, which states that a dollar today is worth more than a dollar tomorrow.
Types of Finance
Because individuals, businesses, and governments all require funding to function, the finance field is divided into three major subcategories:
- Personal finance
- Corporate finance
- Public (government) finance
Finance for Individuals
Financial planning entails analysing an individual’s current financial situation in order to develop strategies for future needs within financial constraints. Personal finance is unique to a person’s situation and activity. As a result, financial strategies are heavily influenced by a person’s earnings, living needs, goals, and desires.
Individuals, for example, must save for retirement, which necessitates saving or investing enough money during their working lives to fund their long-term plans. This type of financial management decision is categorized as personal finance.
Corporate Finance
Corporate finance refers to the financial activities associated with running a corporation, which is typically overseen by a division or department. A large corporation, for example, may need to decide whether to raise additional funds through a bond issue or a stock offering. Investment banks may advise the firm on such matters and assist it in marketing the securities.
Startups may receive funding from angel investors or venture capitalists in exchange for a stake in the company. If a business succeeds and decides to go public, it will sell stock on a stock exchange in an initial public offering (IPO) to raise funds.
In other cases, a company may be attempting to budget its capital and decide which projects to fund and which to postpone in order to grow the business. All of these decisions fall under the purview of corporate finance.
Public Finances
Taxation, spending, budgeting, and debt-issuance policies all have an impact on how a government pays for the services it provides to the public. It’s a component of fiscal policy.
The federal and state governments help to prevent market failure by overseeing resource allocation, income distribution, and economic stability. The majority of regular funding is obtained through taxation. Borrowing from banks, insurance companies, and other countries also contributes to government spending.
What Exactly Are Financial Activities?
Financial activities are the initiatives and transactions undertaken by businesses, governments, and individuals in order to achieve their economic objectives. They are financial transactions that involve the inflow or outflow of funds. Buying and selling products (or assets), issuing stocks, initiating loans, and maintaining accounts are some examples.
When a company sells the stock and repays debt, these are both financial activities. Similarly, individuals and governments engage in financial activities such as borrowing and taxing to achieve specific monetary goals.