Article from http://financefinance.blogspot.com/2007/07/finance-and-concerning-web-link.html 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:
The study of money and other assets; The management and control of those assets; Profiling and managing project risks; The science of managing money; As a verb, "to finance" is to provide funds for business or for an individual's large purchases (car, home, etc.). The activity of finance is the application of a set of techniques that individuals and organizations (entities) use to manage their financial affairs, 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), etc., 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.
Personal finance Questions in personal finance revolve around
How much money will be needed by an individual (or by a family) at various points in the future? Where will this money come from (e.g. savings or borrowing)? How can people protect themselves against unforeseen events in their lives, and risk in financial markets? How can family assets be best transferred across generations (bequests and inheritance)? How do taxes (tax subsidies or penalties) affect personal financial decisions? 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.
Business finance In the case of a company, managerial finance or corporate finance is the task of providing the funds for the corporations' activities. For small business, this is referred to as SME finance. It generally involves balancing risk and profitability. Long term funds would be provided by ownership equity and long-term credit, often in the form of bonds. These decisions lead to the company's capital structure. Short term funding or working capital is mostly provided by banks extending a line of credit.
On the bond market, borrowers package their debt in the form of bonds. The borrower receives the money it borrows by selling the bond, which includes a promise to repay the value of the bond with interest. The purchaser of a bond can resell the bond, so the actual recipient of interest payments can change over time. Bonds allow lenders to recoup the value of their loan by simply selling the bond.
Another business decision concerning finance is investment, or fund management. An investment is an acquisition of an asset in the hopes 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. In doing so, one needs to
Identify relevant objectives and constraints: institution or individual - goals - time horizon - risk aversion - tax considerations Identify the appropriate strategy: active vs passive - hedging strategy Measure the portfolio performance 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.
Shared Services 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.
Finance of states Country, state, county, city or municipality finance is called public finance. It is concerned with
Identification of required expenditure of a public sector entity Source(s) of that entity's revenue The budgeting process Debt issuance (municipal bonds) for public works projects
Financial economics From Wikipedia, the free encyclopedia Jump to: navigation, search Financial economics is the branch of economics concerned with resource allocation over time. It is further distinguished from other branches of economics by its "concentration on monetary activities", in which "money of one type or another is likely to appear on both sides of a trade" .
The questions addressed by the discipline are typically framed in terms of "time, uncertainty, options and information" .
Time: money now is traded for money in the future. Uncertainty (or risk): The amount of money to be transferred in the future is uncertain. options: one party to the transaction can make a decision at a later time that will affect subsequent transfers of money. Information: knowledge of the future can reduce, or possibly eliminate, the uncertainty associated with future monetary value (FMV).
Subject matter Given its scope, as above, financial economics tends to deal with the workings of financial markets, such as the stock market, and the financing of companies, and includes the following subject areas: Budgeting, saving, investing, borrowing, lending, insuring, hedging, diversifying, and asset management. Because the future is never known with certainty, a central concern of financial economics is the impact of uncertainty on resource allocation.
Financial economics thus attempts to answer questions such as:
How are the prices of financial assets determined (stocks, bonds, currencies, and commodities)? What are the effects of a company choosing different methods of financing its operations, such as issuing shares or borrowing? What portfolio of assets should an investor hold in order to best meet his/her objectives?
Assumptions Financial economics is based on several assumptions - chief amongst these, that financial decision makers are rational (see Homo economicus; Efficient market hypothesis). However, recently, researchers in Experimental economics and Experimental finance have challenged this assumption empirically. Further, these assumptions are challenged - theoretically - by Behavioral finance, a discipline primarily concerned with the rationality, or lack thereof, of economic agents.
Other common assumptions include market prices following a random walk, or asset returns being normally distributed. Empirical evidence suggests that these assumptions may not hold, and in practice, traders and analysts, and particularly risk managers, frequently modify the "standard models".
Mathematical finance Mathematical finance is the branch of applied mathematics concerned with the financial markets.
The subject has a close relationship with the discipline of financial economics, which is concerned with much of the underlying theory. Generally, mathematical finance will derive, and extend, the mathematical or numerical models suggested by financial economics. Thus, for example, while a financial economist might study the structural reasons why a company may have a certain share price, a financial mathematician may take the share price as a given, and attempt to use stochastic calculus to obtain the fair value of derivatives of the stock.
In terms of practice, mathematical finance also overlaps heavily with the fields of financial engineering and computational finance. Arguably, all three are largely synonymous, although the latter two focus on application, while the former focuses on modelling and derivation; see Quantitative analyst.
Many universities around the world now offer degree and research programs in mathematical finance.
Experimental finance The goals of experimental finance are to establish different market settings and environments to observe experimentally and analyze agents' behavior and the resulting characteristics of trading flows, information diffusion and aggregation, price setting mechanism and returns processes. This can happen for instance by conducting trading simulations or establishing and studying the behaviour of people in artificial competitive market-like settings.
Researchers in experimental finance can study to what extent existing financial economics theory makes valid predictions and attempt to discover new principles on which theory can be extended.
Finance:Portfolio Theory Harry Markowitz "Portfolio Selection", Journal of Finance, 7 (1),1952, 77-91. Description: Development of the utility framework which shows an optimum can be reached using a portfolio of investments. In effect the first real proof that you should not put all your eggs in one basket. Importance: Precursor to most modern portfolio theory work in finance.
Capital asset pricing model William Forsyth Sharpe "Capital asset prices: A theory of market equilibrium under conditions of risk", Journal of Finance, 19 (3), 1964, 425-442 Description: Development of the Capital asset pricing model used to determine appropriate prices for assets. Importance: Topic creator, Influence
The pricing of options and corporate liabilities Fischer Black and Myron Scholes "The Pricing of Options and Corporate Liabilities" Journal of Political Economy 81, 1973, 637-654. Description: It developed the Black-Scholes model for determining the price of options, in particular stock options. The use of the Black-Scholes formula has become pervasive in financial markets, and has been extended by numerous refinements. Importance: Breakthrough, Influence
Financial plan In general usage, a financial plan can be a budget, a plan for spending and saving future income. This plan allocates future income to various types of expenses, such as rent or utilities, and also reserves some income for short-term and long-term savings. A financial plan can also be an investment plan, which allocates savings to various assets or projects expected to produce future income, such as a new business or product line, shares in an existing business, or real estate.
In business, a financial plan can refer to the three primary financial statements (balance sheet, income statement, and cash flow statement) created within a business plan. Financial forecast or financial plan can also refer to an annual projection of income and expenses for a company, division or department. A financial plan can also be an estimation of cash needs and a decision on how to raise the cash, such as through borrowing or issuing additional shares in a company.
While a financial plan refers to estimating future income, expenses and assets, a financing plan or finance plan usually refers to the means by which cash will be acquired to cover future expenses, for instance through earning, borrowing or using saved cash.
Right-financing The Concept of Right-Financing The concept of right-financing was coined by English Political Economist Dr. Peter Middlebrook to highlight the importance of adopting the appropriate policy, institutional and financial support mechanisms to maximize sustainable returns on both public and private investments over time. The term goes beyond the public sector restructuring concept of right-sizing in that it looks to assess the policy mandate and size of an institutional entity, its functions and their discharge, as well as the staffing structure and establishment with regard meeting investment and development objectives. Whilst originally applied to the security sector, its application as a conceptual framework brings governance, public and private investment finance principles to work towards an optimal financing framework for a given investment.
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