What is finance? Definition & Financial Services
Finance is a broad term that describes activities associated with banking, indebtedness or debt, credit, capital markets, money, and investments. Basically, finance is the management of money and the process of acquiring the necessary funds. Finance also encompasses the monitoring, creation and study of the money, banking, credit, investments, assets and liabilities that make up financial systems.
Many basic concepts in finance come from microeconomic and macroeconomic theories. One of the most fundamental theories is the time value of money, which basically states that a dollar today is worth more than a dollar in the future.
Key points to remember
- Finance encompasses banking, leverage or debt, credit, capital markets, money, investments, and the creation and monitoring of financial systems.
- Basic financial concepts are based on microeconomic and macroeconomic theories.
- The field of finance has three main sub-categories: personal finance, corporate finance, and public (government) finance.
- Financial services are the processes by which consumers and businesses acquire financial goods. The financial services sector is one of the main engines of a country’s economy.
Types of funding
Since individuals, businesses, and government entities all require funding to operate, the finance field has three main subcategories: personal finance, corporate finance, and public (government) finance.
Financial planning involves analyzing the current financial situation of individuals in order to formulate strategies for future needs within the framework of financial constraints. Personal finances are specific to an individual’s situation and activity. Therefore, financial strategies largely depend on the income, living conditions, goals and desires of the person.
Individuals need to save for retirement, for example, which requires saving or investing enough money during their working life to fund their long-term plans. This type of financial management decision is a matter of personal finance.
Personal finance includes the purchase of financial products such as credit cards, insurance, mortgages, and various types of investments. Banking services are also considered a component of personal finance, as individuals use checking and savings accounts as well as online or mobile payment services such as PayPal and Venmo.
Corporate finance refers to the financial activities related to running a business, usually with a division or department set up to oversee those financial activities.
An example of corporate finance: A large corporation may have to decide whether it wants to raise additional funds through a bond issue or a stock offering. Investment banks can advise the company on these considerations and help it market the securities.
Startups can receive capital from angel investors or venture capitalists in exchange for a percentage of ownership. If a company is successful and decides to go public, it will issue shares on the stock exchange through an Initial Public Offering (IPO) to raise funds.
In other cases, a business may try to budget its capital and decide which projects to fund and which to put on hold in order to grow the business. All of these types of decisions are business finance.
Public finances include the policies of taxation, spending, budgeting, and debt issuance that affect the way a government pays for the services it provides to the public.
The federal government helps prevent market failures by overseeing resource allocation, income distribution, and economic stability. Regular funding is provided mainly by taxation. Borrowing from banks, insurance companies and other countries also helps finance public spending.
In addition to managing money in day-to-day operations, a government agency also has social and fiscal responsibilities. A government is expected to provide adequate social programs for its taxpaying citizens and to maintain a stable economy so that people can save and their money is secure.
Financial services are the processes by which consumers and businesses acquire financial goods. A simple example is the financial service offered by a payment system provider when it accepts and transfers funds between payers and payees. This includes accounts paid by checks, credit and debit cards, and electronic funds transfers.
Financial services are not the same as financial goods. Financial assets are products such as mortgages, stocks, bonds, and insurance policies; financial services are tasks â for example, the investment advice and management that a financial advisor provides to a client.
The financial services sector is one of the most important segments of the economy. It stimulates the economy of a country, ensuring the free movement of capital and liquidity in the market. It is made up of a variety of financial companies, including banks, investment firms, finance companies, insurance companies, lenders, accounting departments, and real estate brokers.
When that sector and a country’s economy are strong, consumer confidence and purchasing power increase. When the financial services industry fails, it can cause the economy to slow down and lead to a recession.
What are financial activities?
Financial activities are the initiatives and transactions that businesses, governments and individuals undertake in pursuit of their economic goals. These are activities that involve the entry or exit of money. Examples include buying and selling products (or assets), issuing stocks, initiating loans, and maintaining accounts.
When a company sells stocks and makes debt repayments, these are two financial activities. Likewise, individuals and governments are involved in financial activities, such as obtaining loans and collecting taxes, which contribute to specific monetary goals.