What is Finance? I am sure this is the most asked question by anyone who is new to this topic. You might argue that no one is new to this topic. Everyone uses Finance in some way or the other in their daily life, right?
Yes! you are absolutely right. We all use Finance in our day to day activities. For example, you go to a store to buy groceries, there you pay the store owner for the things you bought. Here the actual money in your account has decreased and that in the store owner’s account has increased.
This is just a basic example of what Finance is. Now, it is not this simple and easy in all cases. That is why for anyone who is willing to enter this field of Finance and Financial management, knowing what is Finance in its true sense becomes important.
So let’s go ahead and first see the meaning of finance.
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Meaning of Finance
If we go back and try to find the origin of Finance, we will end up with evidence to prove that it is as old as human life on earth. The term “Finance” was a French word by origin. In the 18th century, it was adapted by communities that speak English to mean ‘The Management of Money’.
Since then, it has made its way permanently in the English Dictionary. In today’s world finance is not merely a word, it has emerged into an academic discipline of great importance.
Finance’s versatility in terms of practices used has led to it being christened as a division of business portfolio management all by itself.
There is one word that can be considered and sounds synonymous with Finance and that is “Exchange”. Finance in its essence is nothing but the exchange of resources that are available.
Also, an important thing to note is that Finance is not only restricted to the exchange and/or management of money but also the exchange of different financial instruments.
What are Financial Instruments?
To avail financial services, a company or an individual requires financial instruments. A financial instrument is a contract between two parties that involves monetary activities. It can be used for purposes such as lending and borrowing.
Financial instruments are broadly classified as Cash instruments or Derivatives instruments.
Cash markets involve trading mainly in commodities and currencies. It can be in the form of securities, loans, deposits, bills of exchanges, etc. The value of Cash instruments is determined by how the forces in the market move.
Calculated risks in the form of portfolio management and efficient speculations help a lot in making huge amounts of money in such markets.
A derivative is a financial instrument whose value is derived from an underlying asset or entity which can be commodities, bonds, precious metals, stocks, indices, etc.
Common examples include futures, forwards, swaps, and options. The value of derivative instruments is mainly derived from the value of another underlying asset or entity or any other type of factor that can influence the value of the derivatives.
Derivatives are further divided into Exchange-traded derivatives and Over-the-counter derivatives.
Exchange-traded derivatives are highly standardized and regulated with mandates resulting in transparent transactions that are guaranteed against defaults through clearinghouses of the specific derivative exchange.
Over-the-counter derivatives are flexible, customized, lesser-regulated, and have a bit more privacy but possess the uncertainty of defaults.
Many of the basic concepts in finance come from Micro or Macroeconomic theories. One of the fundamental aspects of Finance is the time value of money, which states that the value of money today is more than the value of money in the future.
Types of Finance
Finance works on all levels; personal, collective, and governmental. Hence as per the scope of work, we can classify financial actions into three broad categories:-
1. Personal finance
Personal finance is an individualistic level of financial action. It mainly involves the analysis of the current financial position of the individual to help to formulate strategies for future needs within the analyzed constraints.
It depends on the individual’s earnings, his/her standard of living, desires goals, etc.
2. Public Finance
It includes spending, taxes, budgets, debt issuance policies that affect how the payments the government makes for the provision of public services.
3. Corporate Finance
Includes financial activities related to running the corporation. It generally has a dedicated department or division that oversees all the financial activities the company operates on.
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Financial management is considered an extremely important aspect of today’s businesses. Businesses today require financial management for a wide array of reasons which includes but is not limited to the following:
1. Existence of the business depends on it
Without qualified and skilled personnel to manage funds in the organization, a good business cannot exist and may crumble if there’s a lack of financial skill over time. Growth and expansion are only possible if there is an efficient financial structure in place.
2. Availability of adequate funds when required by the businesses
Financial planning goes a long way to make sure the business never lacks in the future. A good financial plan not only takes care of uncertainties and also provides for the timely availability of funds when required.
3. They help in achieving long term goals for businesses
Finance helps in strategizing the way funds are managed in the business to create a long-term plan about what is to be achieved. Step-by-step investments and careful management of assets and liabilities help the firm in achieving long term goals.
4. Financial planning helps in creating value for the company over time
As mentioned earlier a good financial plan helps businesses to survive and also results in huge returns. A good financial structure leads to investors getting attracted thereby leading to growth.
5. Helps in creating an efficient cash flow management system in the company
Liquid assets move around in an efficient manner which leads to minimum discrepancies and efficient work for the company leading to a huge array of benefits like higher investments, better fundings, smooth audits, etc.
Finance today has grown and spread itself in many places and aspects of our life. Finance has a plethora of career opportunities out there and a massive scope to earn a lot of money if you have the right skills for it. Some of the opportunities include but aren’t restricted to
- Investment Banking
- Portfolio Management (Banking and/or Stocks)
- Commercial Banking
- Wealth Management
- Stock Brokerage
- Stock Market Investments
- Equity Research, etc.
So, in case your interest in Finance has peaked but you don’t know where to begin, there is no need to worry now, you are just a few clicks away from learning about Finance and the Stock Market.
All you need to do is enroll for Verzeo’s pro degree certification course on the same. You can know more about the course on finance by visiting our website.
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