What is Finance?
Finance is a term that addresses issues relating to the management, creation, and study of money and investments. This involves the use of credit and debt, securities, and investments to fund current projects using future income streams. Finance is closely related to the time value of money, interest rates, and other related issues because of this time 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 decisions.
Key Takeaways
Finance is a term that broadly describes the study and system of money, investments, and other financial instruments.
Finance can be divided into three categories: public finance, corporate finance, and personal finance.
Subcategories of finance include social finance and behavioral finance.
The history of finance and financial activities dates back to the dawn of civilization.
Finance has its roots in scientific fields such as statistics, economics, and mathematics, but it also includes non-scientific elements that make it an art.
Understanding Finance
Finance is generally divided into three broad categories: public finance, business finance, and personal finance.
Public finance includes tax systems, government expenditures, budgetary procedures, stabilization policies and instruments, debt issuances, and other government concerns. Corporate finance involves the management of the company’s assets, liabilities, income, and debt. Personal finance defines all of an individual’s or household’s financial decisions and activities, including budgeting, insurance, mortgage planning, saving, and retirement planning.
Key Financial Terms
Asset: An asset is something of value, such as cash, real estate, or property. A company may have current assets or fixed assets.
Balance Sheet: A balance sheet is a document that presents a company’s assets and liabilities. Subtract liabilities from assets to find the company’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 added only once to the principal. This results in interest being charged not only on the principal, but also on interest already accrued.
Equity: Equity means ownership. Stocks are called shares because each share represents a portion of ownership in the underlying business or entity.
Liability: A liability is a financial obligation such as debt. Liabilities can be current or long-term.
Liquidity: Liquidity refers to the ease with which an asset can be converted into cash. Real estate is not a very liquid investment because it can take weeks, months, or even longer to sell.
Profit: Profit is the money left over after expenses. A profit and loss statement shows how much business has made or lost in a given period.
History of Finance
Finance originated in the 1940s and 1950s as a study of theory and practice distinct from the field of economics. It began with the work of Harry Markowitz, William F. Sharpe, Fischer Black, and Myron Scholes.123 Particular areas of finance such as banking, credit, and investments have existed in one form or another since the dawn of civilization.
The financial transactions of the early Sumerians were formalized in the Babylonian Code of Hammurabi around 1800 BC. This set of rules regulated the ownership or rental of land, the employment of agricultural labor, and credit.4 Yes, there were loans back then, and yes, interest was charged on them: this. The rates varied depending on whether you borrowed grain or money.
Cowrie shells were used as currency in China around 1200 BC. Minted currency was introduced in the first millennium BC. King Croesus of Lydia, in what is now Turkey, was one of the first to mint and circulate gold coins around 564 BC. Hence the expression “rich as Croesus.”5
The coins were stored in the cellars of the temples of Rome.