Finance is a broad term encompassing a number of things about the financial management, formation, and allocation of funds. It is concerned with the management of financial resources, though it is often also referred to as economic or business management. It is important to understand that there are many different facets of finance. All the different facets of finance have an effect on society, but finance has a major impact on how people live their lives. The word “finance” literally means “a process or system for managing resources.”
The most common area in which finance is applied is in accounting. Accounting is the process of recording financial transactions such as sales, purchases, income, and expenses. Accountants record these transactions in books of accounts, journals, ledgers, and computerized systems. The three major areas of accounting are management of internal control (MOC), financing, and taxation.
There are many different career paths in accounting. The most common finance positions are auditors, CPAs, investment bankers, mortgage brokers, securities agents, financial analysts, and financial counselors. The different career paths in accounting all have different responsibilities and work environments. Auditors, for example, follow and supervise the accounting practices of the company.
Capital markets finance refers to the buying and selling of bonds and other financial assets. Capital markets also include financial markets that trade in corporate debt and derivatives. Hedge funds are popular investments that use complex derivatives as security for the investors. Other types of finance are derivatives, money markets, and proprietary trading. Derivatives refer to those securities that can be converted into cash.
The three main components of corporate finance are: capital structure, working capital options, and credit facilities. Capital structure is the method by which an individual or business to obtain the money they need to finance their corporate activities. The most common forms of capital structure include debt, equity, recourse, lease, and capitalized funds. Working capital options refer to those financial activities in which money is used to finance plant and equipment, purchase raw materials and supplies, and make payments on accounts payable.
As mentioned above, there are various components of the field of finance. These components include: money management, savings and lending, and investment and business banking. Money management is the process in which a firm determines how to invest its income. Savings and lending refer to those financial transactions in which banks lend money to businesses. Business banking is the process of borrowing money that is employed for the purpose of making loans to other businesses.
Investment banks are financial institutions that deal directly with borrowers and issue company-wide capital funds. Many major investment banks control hundreds of billions of dollars in venture capital, working capital, corporate finance, commercial real estate, merchant cash advance, and commercial mortgage debt. Some of the largest investment banks are located in the U.S. and are domiciled in the country. There are also international investment banks that operate in various countries and are considered to be part of the foreign portfolio of an investment bank.
The finance subcategories can be further broken down into five main subcategories according to how they make finance products. These are banking, insurance, investment banking, corporate finance, and financial marketing. While these are the three main subgroups of finance, there are also other subcategories such as derivatives, information technology, municipal finance, private funding, and government finance. All the subcategories of finance have been discussed at length in numerous finance study reports and books. A detailed account of all the subcategories can be found in a number of finance books.
Banking refers to the transfer of money from one source to another. This can take the form of saving or borrowing for investment purposes or it can also be just a direct transfer of money between individuals or establishments. The objective of banking is to create financial goods or services that can be used as collateral for future loans. In order to create capital goods or services, banks must process loan applications through the lending process.
Insurance is an insurance term that is generally used to refer to risk management. It deals with insurance premium payments, benefit payments, and claim settlements. All finance products and services fall under the purview of insurance. Financial systems are broken down into three primary areas: investment finance, money management, and capital markets. Within these three main areas, there are multiple subsets that deal with different aspects of each area.
Finance is extremely dynamic, always changing, and ever-changing. If you think about the last ten years, the globe has changed drastically, especially with the advent of the internet and technology. The world economy is no longer based on hard steel and assembly lines but on information technology, finance, and technology. Finance theory deals with how money is created, how it is saved, and how it is dispersed. In order to understand your personal finance, corporate finance, and other types of finance, it is very important that you understand what each subcategory within the larger field means.