What is finance? An overview of finance that helps in understanding it
Do you think the term “Finance” is always related to large corporations and businesses? Absolutely not! The term “finance” has its significance in the everyday life of all individuals. What is finance and how can we define finance in broad terms? Does it have any types? What are financial services? This blog will answer all these questions and help you understand more about finance.
What is finance?
Finance refers to the management of money-related activities such as banking, investments, capital market, leverage, credit, and more. It includes activities such as budgeting, saving, investing, borrowing, and managing funds that are related to an individual, government, and business.
In other terms, finance is the process of multiplying or manipulating money, funds, and assets by also handling the uncertainties and risks associated with them.
Types of finance
Starting from an individual to all the larger business organizations and government, need funds to operate efficiently. So, there are three types of finance, based on whether the fund management is up to the level of an individual or corporate, or government.
- Personal Finance
- Corporate Finance (Business)
- Public Finance (Government)
Every individual needs proper planning of funds and finance for leading a better life. It helps him/her to plan the investments in the present and to analyze the future needs. Without proper planning and saving of funds, one cannot form a strong financial base in their living.
Personal finance involves the management of an individual’s income, his/her expenses, savings, and investments. One can effectively manage their finances with the help of a personal bank service, an adviser, and other professionals.
Managing personal finance helps in achieving long-term goals and desires in terms of finance. Based on the income of an individual, personal finance management helps him/her to invest wisely in investments such as education, real estate, medical insurance, cars, and more.
Corporate finance deals with the management of funds from an organization or business perspective. It helps in managing the funding source for a company, its capital, its profit, loss, and more.
It involves every financial activity that is related to the company’s growth. Corporate finance professionals, accountants, managers, financial analysts, and executives help in managing the financial activities of a company.
Corporate finance helps in building the company’s capital structure. It always aims for raising a company’s financial position, thereby uplifting the shareholder’s profit by long-term and short-term planning of finances.
3. Public Finance
Public finance is the study and management of the state’s revenue and expenses. Public finance deals only with the finances associated with the government. It involves the study of various funds allocated for the activities of a state and the management of its related finances.
Collection of tax revenue and using it for state activities such as hospital construction, roads construction, etc, comes under public finance.
Public finance focuses on maintaining a stable economy by managing money, collecting taxes from citizens, budgeting, maintaining debts, and providing services to the public.
Other types of financing
Apart from the above three finance types, there are some other financing types available. It includes,
- Behavioral: This type of financing depends on human decisions. Human judgments based on logic, biases, errors have a major impact on finances.
- Social: It involves the management of investments based on the social benefit and impact on society.
- Non-profit: They also require financial management like the other companies, but they do not aim for making earnings or profits.
Microfinance (also known as microcredit) deals with the management of finances for lower-income and unemployed individuals. For these individuals, banks offer additional services such as training, microinsurance, and saving accounts.
Microfinance mainly focuses on providing opportunities for these individuals to become independent and self-reliant. It also provides some educational programs and training related to finances and makes them educated about what is finance and financial terms and concepts.
International trades, their associated financial services, and instruments come under trade finance. It plays a major role in exporting and importing goods and services internationally and thereby reduces the global trade risks.
Trade finance protects both the importers and exporters involved in the trading from various risks associated with international trading. Some of the risks related to international training are political instability, currency fluctuations, the creditworthiness of parties, etc.
How trade finance eliminates trade risks?
Trade finance reduces the risks of payment and supply, as it involves a third party to conduct transactions. The payments should be provided according to the agreements made between the importer and exporter. In addition to reducing the risks, trade finance also helps in upgrading efficiency and revenue. Trade finance involves parties such as importers, exporters, credit agencies, banks, insurers, and trade finance companies.
Instruments in finance
The financial instrument is essential for availing financial services for an individual or a company. It is a contract or agreement between two parties involved and its associated monetary activities. They are useful for investment or financial purposes such as lending and borrowing. There are two types of financial instruments:
- Cash Instruments
- Derivative Instruments
The instruments that can be transferred easily by the parties come under cash instruments. They include loans, deposits, securities, etc. These instruments are influenced by market forces. Certificate of deposits, repurchase agreements, interbank loans, e securities, commercial paper, etc are some of the cash instruments.
The instruments that are derived from another entity’s valuation such as assets or indexes are included under the derivative instruments. Futures, swaps, forwards, and options are some of the commonly available derivative instruments in the market.
Financial services involve the processes of acquiring financial goods by consumers and businesses. It includes finance-related tasks such as investment advice and management.
For example, fund transferring service provided by a payment system. It involves transferring the payment from payers to recipients.
Sectors providing financial services play a significant role in improving the nation’s economy. Financial firms such as investment houses, banks, accounting services, insurance companies, real estate brokers, etc make up the sector.
In simple terms, financial activities include buying and selling assets, issuing stocks, and managing accounts and loans. It includes all the transactional activities related to individuals, businesses, and government.
Financial activities are the activities that help businesses, individuals, and the government to achieve specific economic goals. They involve all the outflow and inflow of money related to the company or an individual.
From this blog, we learned what is finance, types of finance, financial services and activities, etc. This helps in providing an overview of finance and its related activities.
Frequently Asked Questions
1.What is finance and why is it important to understand the basics of finance?
Finance involves the management of money and funds, related to an organization or an individual. Without understanding the basics of finance, it is difficult to make decisions and affect the overall well-being of your personal life or an organization.
2.What is finance and its types?
Finance is the effective management of funds related to lending, borrowing, saving, etc. Types of finance include