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What is Finance

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Finance corresponds to an area of ​​the economy that studies the obtaining and administration of money and capital, that is, financial resources. Study both obtaining these resources (financing), as well as investment and saving them.

Finance studies how economic agents (companies, families or the State) must make investment, savings and spending decisions under conditions of uncertainty. When choosing, agents can opt for various types of financial resources such as: money, bonds, stocks or derivatives, including the purchase of capital goods such as machinery, buildings and other infrastructure.

The financial intermediaries are agents dedicated to contacting the two parts of finance, savers and those who need funding.

Areas of study of finance

Finance studies a wide range of transactions related to the optimal management of financial resources. Among its areas of study are:

- The study of the profitability of investments: When it's convenient or not to invest in a project or how to choose between several projects.
- How to properly manage debt: Keep indebtedness under control and take advantage of its benefits to grow in the future.
- Keep changes in the value of money over time under control: Control the loss of value of money in scenarios with inflation.
- The determination of the prices of tangible and intangible assets: Value assets based on their risk and expected rate of return.

Types of Finance

Finance can be divided into four large groups:

- Corporate finance: It focuses on the study of obtaining and managing company resources. Among his areas of study are:

1. In which productive projects should be invested.
2. When to distribute dividends.
3. What are the optimal financing options.

- Personal finance: Refers to the study of obtaining and managing the resources of families or individuals. Among his areas of study are:

1. How to choose a profitable career or profession.
2. The optimal management of labor income and indebtedness.
3. Investment and savings decision making (such as when to buy a house or where to put our savings).

- Public finances: It deals with the study of obtaining and managing the financial resources of state institutions. Among his areas of study are:

1. Obtaining resources through taxes.
2. Investment in profitable public projects.
3. The choice of mechanisms for redistribution of resources.
4. The appropriate management of the government deficit and surplus.

- International Finance: Refers to the study of international financial transactions. Among his areas of study are:

1. Indebtedness abroad.
2. The effects of the fluctuation of the exchange rate on profitability.
3. Foreign capital movements.
4. The inherent risk of investing in a certain country.

Finance Resources

To study finance there are several tools that manage and analyze financial resources and the use made of them. Here are some examples of these resources:

- Accounting: It's a finance resource that serves to manage the expenses and income of a company. It's a key tool to know what situation a company is in and, with this documentation, to establish the necessary strategies in order to improve its economic performance. Accounting can be used to manage any group: corporate finance, personal finance, public finance and international finance. - Behavioral finance: They are the field that analyzes finances from a psychological point of view. Describe how people behave and how they make decisions. It's born from the union of psychology,traditional economics and neuroeconomics.

Origin of Finance

The origin of finance can be found around the fifteenth century, with the rise of capitalism. It's at this time when commercial banks that offer intermediation, loan and savings services begin to develop.

Over time, financial institutions and their products have evolved and modernized. New intermediaries have appeared other than traditional banks (such as portfolio management companies, collective investment institutions, etc.) and also new financial products that offer many options to customers.

As for its theoretical development, only in the twentieth century did finance become an area of ​​study itself. Its origin can be found in the works of Irving Fisher in 1897 where he refers to finance as a new discipline.

His field of study has been refined over time, with the development of theories that attempt to explain the optimal determination of asset prices, expected profitability, decisions in uncertainty scenarios, etc.


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