What is Finance?
Finance is defined as the management of money and includes activities like investing, borrowing, lending, budgeting, saving, and forecasting. There are three main types of finance: (1) personal, (2) corporate, and (3) public/government. This guide will unpack the question: what is finance?
The easiest way to define finance is by providing examples of the activities it includes. There are many different career paths and jobs that perform a wide range of finance activities. Below is a list of the most common examples:
- Investing personal money in stocks, bonds, or guaranteed investment certificates (GICs)
- Borrowing money from institutional investors by issuing bonds on behalf of a public company
- Lending money to people by providing them a mortgage to buy a house with
- Using Excel spreadsheets to build a budget and financial model for a corporation
- Saving personal money in a high-interest savings account
- Developing a forecast for government spending and revenue collection
There is a wide range of topics that people in the financial industry are concerned with. Below is a list of some of the most common topics you should expect to encounter in the industry.
- Interest rates and spreads
- Yield (coupon payments, dividends)
- Financial statements (balance sheet, income statement, cash flow statement)
- Cash flow (free cash flow, other types of cash flow)
- Profit (net income)
- Cost of capital (WACC)
- Rates of return (IRR, ROI, ROA)
- Dividends and return of capital
- Creating value
- Risk and return
- Behavioral finance
Sources of Financial Information
To learn more about the industry, here are some of the most popular and helpful resources:
- Google Finance (market data, stock prices, news, etc.)
- The SEC website (company filings)
- Bloomberg news (company and industry news)
A definition of finance would not be complete without exploring the career options associated with the industry. Below are some of the most popular career paths:
- Commercial banking
- Personal banking (or private banking)
- Investment banking
- Wealth management
- Corporate finance
- Mortgages / lending
- Financial planning
- Equity research
The role of finance is very crucial. It is the backbone of every activity. For example: suppose you’ve to purchase a car, you’ll start your planning only if your finances allow you. But there’s a huge difference between amount of capital required for purchasing a car and sanctioned by selecting different types of finance. What are the two main types of finance? There are mainly two types of financing. They are broadly divided as debt finance and equity finance. These categories are further divided into various types like: short-term, medium- term and long-term. There are various options available for financing based on type of finance you required.
Many of the basic concepts in finance originate from micro and macroeconomic theories. One of the most fundamental theories is the time value of money, which essentially states that a dollar today is worth more than a dollar in the future.
Since individuals, businesses, and government entities all need funding to operate, the finance field includes three main sub-categories: personal finance, corporate finance, and public (government) finance.