Finance is the act of channeling funds from investors and borrowers to entities who need it most. When put to effective use, investors and borrowers have readily available money in the market that can earn high dividends or interest. A wide variety of financial tools are employed in finance such as: borrowing, lending, and investment. Each tool has its own benefits and disadvantages that must be weighed carefully before applying.
Personal finance includes deposits in savings accounts, individual retirement accounts (IRAs), checking accounts, money market, and certificates of deposit (CDs). It also includes investments in securities like stock, bond, and mutual fund. The term is broader than business finance because it also includes real estate, lending, and financial derivatives such as futures and options. Within the spectrum of personal finance, there are five prominent categories that include banking, non-banking, commercial banking, investment banking, and non-financial trading.
Banking is the practice of receiving and providing loans for specific purposes. Most banking transactions are technically conducted through banks. Examples of commercial banks include commercial banks, savings and loan, and credit unions. The most common business financing involves purchases, loans, and leases. The term “business finance” encompasses all aspects of purchasing assets for the purpose of making profit; however, the scope of this type of finance is much broader than traditional banking.
Non-banking finance refers to the activities of publicly traded corporations. Examples of publicly traded corporations are hedge funds, mutual funds, and insurance companies. Publicly traded corporations allow interested parties to purchase shares of stock for a pre-set price. Unlike banking, non-banking financial services do not require collateral. They are used mostly for short-term investments and for making higher profits.
Behavioral finance is an area of study that examines the decision making process underlying individual actions. It makes use of mathematically models and financial databases to help individuals make better financial decisions. An example of behavioral finance is an investment decision. Two individuals, A and B, may both buy an asset because of information about the asset’s expected value. The difference between the expected value of the asset and the actual value is the behavioral return. Researchers believe that people make irrational financial decisions more frequently than they make rational ones.
Finance is one of the most important, if not the most important, parts of the business world. It affects every aspect of business from pricing to capital budgeting to sales and production. It is crucial to the survival of organizations and thus the well-being of society as a whole. One of the most common topics of research in the finance industry involves understanding and predicting the behavior of the financial industry, understanding the psychology of investing.