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What is Finance?

Finance is a broad term encompassing various things regarding the study, creation, allocation, and management of financial resources. The discipline includes the accounting, administration, economics, law, management, investment, management information systems, monetary policy, risk, strategies, and other related subjects. Finance is also involved in the measurement, treatment, aggregation, and price measurement of financial instruments. There are many fields in which finance is used.

Finance has been called the “language of finance”. Finance theories are inherent in all economic policies and practices and are expressed or implied by the method by which funds are invested, the total value of the instruments that are held, and the total income or value of the markets by which they are traded. A wide variety of human activities, including saving, borrowing, making purchases, selling, and trading, are involved in the process of financing. Some of the most important financial activities are interest payments on loans, building and maintenance of physical assets, repaying debts, creating capital goods, paying wages and salaries, and transferring ownership of property to individuals or organizations.

The history of finance is an interesting one, dating back at least as far as the ancient world. The earliest records of writing down finance information came from the Babylonian era, approximately 1200 BC. The term “finance” does not appear in the writings of any of the ancient Greek authors who wrote during the period of classical Greece, nor in the epics of Homer.

During the Middle Ages, there were very few developed financial systems in Europe because most banking was decentralized, not public. In fact, only aristocrats and the rich had any real knowledge of how to manage their finances. Medieval banking started out as a sort of system of mutual borrowing among family members and became more institutionalized after the feudal collapse in the thirteenth century. Today there are three main subcategories of contemporary finance: public finance, business finance, and self-directed private equity (SCORE).

Public finance covers governmental activities, including the central government and local governments in both developed and developing countries. Business finance is essentially the area of investing in the businesses of a nation. Self directed private equity refers to the investment in non-traditional businesses, which are usually profitable but not necessarily publicly traded. All three subcategories of contemporary finance are intimately connected with each other and have influences on each other. For example, it is estimated that almost 25 percent of all new small businesses are started in finance.

In addition to being extremely dynamic and important to the overall economic development of societies, finance has become a key determinant of the health of the money supply of any country. Finance decisions affect businesses, consumers, national budgets, and the political economy of a country. Therefore, it is very important to understand the function of finance in the different sectors of the economy and how it affects the day-to-day operations of people, businesses, and governments. This allows people to determine their own role in the economic model, whether by investing in business or saving for retirement, or by becoming more aware of the services they offer to clients and customers.