Understanding Finance

Finance is a broad term encompassing a variety of things about the study, development, management and allocation of funds. In particular, it concerns the questions of who, what, when and where an individual, business or governmental agency get the funds required for their activities and how they use those funds. The field is also concerned with the behavior of the market participants as well as the effects of changes in supply or demand on the prices or value of goods or services. Changes in financing methods and interest rates are among the many topics that Finance students learn about.

Some of the topics that Finance students learn about include: public finance, private finance, venture capital, insurance and pension financing, bank lending, business credit, commodity markets, international finance, corporate law, and banking regulations. The first two topics, public finance and private finance, pertain to how the government funds its activities; the latter topic, however, takes into account the role of private organizations, corporations and insurance companies in public funding. Insurance companies, for instance, may lend their own funds or by funds from the government. Venture capital refers to private investors providing start-up capital to small businesses. Bank lending involves loans from the Federal Reserve or other major banks.

The third topic, corporate finance, is concerned with raising or managing capital for the operation of financial activities such as buying and selling of securities, interest rates on loans and other assets, mergers and acquisitions and property financing. In addition, corporate finance helps determine which types of transactions should be made, which costs should be included in the cost of doing business and that tax benefits are available. Financial activities associated with mergers and acquisitions include the negotiation of buyouts, which can be very expensive, as well as the determination of prices for the acquired businesses. While these types of financial transactions tend to generate high long-term capital gains, they can also create short-term cash flow problems if the acquired businesses don’t generate enough revenue to cover the debt payments and other charges related to the transactions.

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