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What is Finance? The ABC's of Finance

Updated on December 2, 2012
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What is Finance?

Officially, Finance is the study of how investors invest their assets over time, under conditions of certainty and uncertainty. Finance is more simply, how people invest their money, and to what risk level they do this under. Finance can be broken down into three subcategories: Personal Finance (individuals), Public Finance (government), and Corporate Finance (companies).

Personal Finance

Personal Financial decisions revolve around stuff like paying for education, buying a house, or saving money for retirement. A individual must be in touch with their financial position. A financial position takes into account one's net worth, income, cash flow, and assets to create a realistic plan to complete an individuals goal, such as saving for retirement. Personal finance also deals with how much taxes one pays, and how to manage these taxes with your budget. Financial planning is also considered personal finance. Financial planning creates a plan to pay for large purchases, important events (EX: wedding), and paying for education. A financial plan tells you how much money you need to accomplish these goals which you have set for yourself. Financial planning deals also with your investments, and what their projected earnings will be for the future.

Public Finance

Public finance is involved with countries, states etc., and is the finance of the government. Public finance deals with the paying for of schools, governmental projects, and government run programs. Public finance also involves the budgeting process (forefront of Presidential debate).

National Treasury Building
National Treasury Building | Source

Corporate Finance

Corporate finance provides the funds needed for a companies activities. Corporate Finance deals with limiting risk for a company, while maximizing profits. Companies attempt to protect their value by trying to eliminate risks such as inflation and foreign exchange. Everything done in finance comes with some amount of risks, but companies try to identify these risks and make them as small as they can.

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Financial Services/ Capital

A simple and obvious example of a financial service is, of course, a bank. A bank for example helps finance a project, such as buying a house, by issuing loans to people. These loans come with interest that the buyer must pay for. Banks also allow for people to deposit their money, keeping it safe (with little risk), and offer interest on this money so it can grow.

Capital

Capital is the money available for a business to buy more goods to sell. The amount of Capital any given business has, depends on the business's budget. The budget entails how much it costs to provide the goods, how much they make from selling the goods, and how much their net (overall) profits are.

This is only a very brief and simple introduction to Finance. Finance includes much more and can be much more complicated. I hoped you enjoyed and learned a little from this article.

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