What ls Finance?
Finance is a term that addresses regarding the management, creation and study of money and investment. It involves the use of credit and debt, securities, and investment to finance current projects using future income
Flows. is closely linked to the time value of money,interest rates,and other related topics because of this temporal aspect.
Finance can be broadly divided into three categories
- Public finance
- Corporate finance
- Personal finance
Other specific categories include behavioral finance, which seeks to identify the cognitive,emotional, Social, and psychological reasons behind financial decision.
Understanding Finance
is typically broken down into three broad categories: public fiance, corporate Finance, and personal
Public finance includes tax systems, government expenditures, budget procedures, stabilization policies and instruments, debt issues, and other government concerns. Corporate finance involves managing assets, liabilities, revenues, and debts for businesses. Personal finance defines all financial decisions and activities of an individual or household, including budgeting, insurance, mortgage planning, savings, and retirement planning.
Key Finance Terms
Asset: An asset is something of value such as cash, real estate,or property. A business may have current assets or fixed assets.
Balance sheet: A balance sheet is a document that show a company’s assets and liabilities. Subtract the liabilities from the assets to find the firm’s net worth.
Cash flow: Cash flow is the movement of money into and out of a business or household.
Compound interest: Compound interest is calculated and added periodically, unlike simple interest which is interest added to the principal one time. This results in interest being charged not only on the principal but also on the interest that’s already accrued.
Equity: Equity means ownership. Stocks are called equities because each share represents a portion of ownership in the underlying corporation or entity.
Liquidity: Liquidity refers to how easily an asset can be converted to cash. Real estate isn’t a very liquid investment because it can take weeks, months, or even longer to sell.
Profit: Profit is the money that’s left over after expenses. A profit and loss statement shows how much a business has earned or lost for a particular period.
History of Finance
Finance arose as a study of theory and practice distinct from the field of economics in the 1940s and 1950s. It began with the works of Harry Markowitz, William F. Sharpe, Fischer Black, and Myron Scholes
Particular realms of finance such as banking, lending, and investing have been around in some form since the dawn of civilization
The financial transactions of the early Sumerians were formalized in the Babylonian Code of Hammurabi around 1800 BCE. This set of rules regulated ownership or rental of land, employment of agricultural labor, and credit.Cowrie shells were used as a form of money in China by 1200 BCE. Coined money was introduced in the first millennium BCE. King Croesus of Lydia, which is now Turkey, was one of the first to strike and circulate gold coins around 564 BCE. Hence the expression “rich as Croesus.
Early Stocks, Bonds, and Options
Belgium claims to be home to the first exchange with one in Antwerp dating back to 1531.East India Co. became the first publicly traded company in the 1600s as it issued stock and paid dividends on proceeds from its voyages The London Stock Exchange was created in 1773 and was followed by the New York Stock Exchange less than 20 years later. The London Exchange had been around since the 1570s as the Royal Exchange .
What Is the Purpose of Finance?
involves borrowing and lending, investing, raising capital, and selling and trading securities. The purpose of these pursuits is to allow companies and individuals to fund certain activities or projects to be repaid in the future based on income streams generated from those activities .
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