Finance Information

What Is Finance?

Finance is a broad term that describes activities associated with banking, leverage or debt, credit, capital markets, money, and investments. Basically, finance represents money management and the process of acquiring needed funds. Finance also encompasses the oversight, creation, and study of money, banking, credit, investments, assets, and liabilities that make up financial systems. Many of the basic concepts in finance originate from micro and macroeconomic theories. One of the most fundamental theories is the time value of money, which essentially states that a dollar today is worth more than a dollar in the future.

Types of Finance

Since individuals, businesses, and government entities all need funding to operate, the finance field includes three main subcategories: personal finance, corporate finance, and public (government) finance.

Personal Finance

Financial planning involves analyzing the current financial position of individuals to formulate strategies for future needs within financial constraints. Personal finance is specific to every individual’s situation and activity; therefore, financial strategies depend largely on the person’s earnings, living requirements, goals, and desires.

Individuals must save for retirement, for example, which requires saving or investing enough money during their working lives to fund their long-term plans. This type of financial management decision falls under personal finance.

Personal finance includes the purchasing of financial products such as credit cards, insurance, mortgages, and various types of investments. Banking is also considered a component of personal finance since individuals use checking and savings accounts, and online or mobile payment services such as PayPal and Venmo.

Finance

Corporate Finance

Corporate finance refers to the financial activities related to running a corporation, usually with a division or department set up to oversee those financial activities.

One example of corporate finance: A large company may have to decide whether to raise additional funds through a bond issue or stock offering. Investment banks may advise the firm on such considerations and help them market the securities.

Startups may receive capital from angel investors or venture capitalists in exchange for a percentage of ownership. If a company thrives and decides to go public, it will issue shares on a stock exchange through an initial public offering (IPO) to raise cash.

In other cases, a company might be trying to budget its capital and decide which projects to finance and which to put on hold in order to grow the company. All of these types of decisions fall under corporate finance.

Public Finance

Public finance includes tax, spending, budgeting, and debt issuance policies that affect how a government pays for the services it provides to the public.

The federal government helps prevent market failure by overseeing the allocation of resources, distribution of income, and economic stability. Regular funding is secured mostly through taxation. Borrowing from banks, insurance companies, and other nations also help finance government spending.

In addition to managing money in day-to-day operations, a government body also has social and fiscal responsibilities. A government is expected to ensure adequate social programs for its tax-paying citizens and to maintain a stable economy so that people can save and their money will be safe.

Financial Services

Financial services are the processes by which consumers and businesses acquire financial goods. One straightforward example is the financial service offered by a payment system provider when it accepts and transfers funds between payers and recipients. This includes accounts settled via checks, credit and debit cards, or electronic funds transfer.

The financial services sector is one of the most important segments of the economy. It drives a nation’s economy, providing the free flow of capital and liquidity in the marketplace. It is made up of a variety of financial firms, including banks, investment houses, finance companies, insurance companies, lenders, accounting services, and real estate brokers. When this sector and a country’s economy are strong, it boosts consumer confidence and purchasing power. When the financial services sector fails, it can drag down the economy and lead to a recession.

Examples

The easiest way to define finance is by providing examples of the activities it includes. There are many different career paths and jobs that perform a wide range of finance activities. Below is a list of the most common examples:

Investing personal money in stocks, bonds, or guaranteed investment certificates (GICs)
Borrowing money from institutional investors by issuing bonds on behalf of a public company
Lending money to people by providing them a mortgage to buy a house with
Using Excel spreadsheets to build a budget and financial model for a corporation
Saving personal money in a high-interest savings account
Developing a forecast for government spending and revenue collection

Finance Topics

There is a wide range of topics that people in the financial industry are concerned with. Below is a list of some of the most common topics you should expect to encounter in the industry.

Interest rates and spreads
Yield (coupon payments, dividends)
Financial statements (balance sheet, income statement, cash flow statement)
Cash flow (free cash flow, other types of cash flow)
Profit (net income)
Cost of capital (WACC)
Rates of return (IRR, ROI, ROA)
Dividends and return of capital
Shareholders
Creating value
Risk and return
Behavioral finance

Sources of Financial Information

To learn more about the industry, here are some of the most popular and helpful resources:

Google Finance (market data, stock prices, news, etc.)
The SEC website (company filings)
Bloomberg news (company and industry news)

Finance Careers

A definition of finance would not be complete without exploring the career options associated with the industry. Below are some of the most popular career paths:

Commercial banking
Personal banking (or private banking)
Investment banking
Wealth management
Corporate finance
Mortgages / lending
Accounting
Financial planning
Treasury
Audit
Equity research
Insurance

Additional Finance Resources

CFI is on a mission to help anyone become a world-class financial analyst by creating the Financial Modeling & Valuation Analyst (FMVA)™ certification program. To continue developing and preparing for a career in the field, these additional CFI materials will be helpful: