Finance - Term Overview

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Finance is an area of economics and business administration that is dedicated to the study of obtaining capital resources (that is, financing ) and the transactions that involve investment and savings, considering the risk and uncertainty that this entails. it implies. These types of resources (money and other forms of assets) are therefore known as financial resources.

Financial studies are interested in money management. That is, due to the type of decisions that different economic agents (the State, companies or individuals) can take to better manage their resources, betting on their multiplication and on the fulfillment of their corresponding objectives.

The world of banking, debt, business investment and the stock market are part of the interests of finance.

The formal study of finance is divided into two main branches, according to their particular focus:

- Corporate finance, which takes the perspective of who requires funds or assets to make an investment, that is, who needs to generate resources.
- Asset valuation, which instead assumes the perspective of those who have capital to invest, and want to do so in the most profitable way possible.
- These branches, in turn, are divided into a diverse set of areas of application of financial knowledge.

Characteristics of finance

Broadly speaking, finances are characterized by the following:

- They deal with the management of money and capital goods : banking and savings, investments (bonds, stocks, etc.), loans, etc.
- As an area of ​​knowledge, finance is located between economics, administration and accounting.
- They handle key concepts such as risk, benefit, interest rate, investment costs, etc., which serve to describe how the world of money works.
- They allow the improvement of money management for both public and private entities, both individuals or families, and large corporations.
- They rely on the knowledge of other auxiliary disciplines, such as economics, accounting, statistics and mathematics.

Types of finance

Finance can be classified into two large branches: public finance and private finance, each of which in turn has an important set of sub-branches or specialties.

- Private finance: They are those that seek the optimization of resource management in the case of private or individual entities: SMEs, large corporations, families or individuals. They cover the following areas:

  • Personal finances, those that have to do with the individual handling of money: income, fixed expenses, decision making regarding how to spend the money and on what, etc.
  • Family finances, understood as the sum of the finances of individuals who share a home, and who jointly face the expenses that this entails, and make joint plans for the future.
  • Corporate finance, which has to do with the management of the assets of private companies or organizations, that is, their financing decisions, their investment methods and their managerial decisions.
- Public finances: They are those that involve the State or the public companies that the State manages, and therefore are managed in different terms from the private ones. They cover the following areas:
  • Fiscal policy, that is, the way in which a State collects and administers the taxes it obtains from its citizens.
  • Public spending, which has to do with the way in which the State invests the money it manages and how much money it injects back into society in the form of jobs, purchases, etc.
  • Public debt, in the event that a State cannot cover its expenses, and goes into debt with private sectors to keep the State apparatus running.
  • Public budget, which has to do with the projections of future expenses that a State makes, taking into account its financial moment.

Importance of finance

Given the fundamental principle of every economy, which is that the resources available in the world are finite, while the needs that we must cover with them are infinite; Or, put another way: that money isn't enough to do or have it all at once, the importance of a field of study such as finance is obvious.

Finance allows individuals and organizations to play the game of capitalism in the best possible way, to obtain the necessary resources at the right time, and to be able to keep the economic machinery running.

Waste, bad investment, administrative clutter, and poor decisions can lead a productive and useful initiative to its ruin. That is why resource management is something that no one today can afford to ignore.

Differences between finance and economics

Simply put, finance is a branch or sector of the vast world of economics. Therefore, both disciplines interrelate and affect each other.

However, economics has a much broader focus: it studies the ways in which human needs can be satisfied through the production methods available to them. Finance, seen this way, focuses only on money, and especially on industry and the business world.

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