Meaning and Context of Finance

 Meaning of Finance

Finance, as a distinct branch of theory and practice from economics, arose in the 1940s and 1950s with the works of Markowitz, Tobin, Sharpe, Treynor, Black, and Scholes, to name just a few. Topics of finance such as money, banking, lending, and investing had been around since the dawn of human history in some form or another.

Finance is a broad term that describes activities associated with banking, leverage, credit, a system of money, capital market, investments, and financial instruments. Finance thus can be defined as the science and art of managing money to achieve an appropriate objective.

So, finance decisions deal with how money is raised and used by businesses, governments, and individuals. Finance as the management of money includes activities such as investing, borrowing, lending, budgeting, distributing, saving, liquidity handling, and forecasting.

    Finance= Managing Money to Get an Objective Fulfilled

Finance in Different Context

Finance can be thought of, or the concept of finance can be linked with different contexts like personal context, government context, or government context.

Personal Context

From a personal context if we think about finance then we can say finance is the management of money for personal objectives. So, thinking regarding personal finance may include.

• How to earn an adequate amount of money
• How much money to spend and save
• How much to borrow if it is necessary?
• How much money to invest if you have an extra for future consumption
• Where to invest the money
• When to invest the money

The answer to these questions will obtain if you are dealing with personal finance.

Government Context

In the case of government context, finance will be dealing with the following issues.

• Generating government revenue (by deciding how much to tax)
• Public spending (how much to spend)
• Budgeting
• Government debt
• Production and distribution of public goods

Business Context

If we think about the business context of finance, then it will be dealing with the following issues.

• In what fixed assets to invest
• How to raise money for the investment
• How to manage the short-term cash flows
• How much to reinvest in the business?
• How much to retain and distribute?

Finance Topics

There is a wide range of topics that people in the financial industry are concerned with. Below is a list of some of the most common topics you should expect to encounter in the industry.

• Interest rates and spreads
• Yield (coupon payments, dividends)
• Financial statements (balance sheet, income statement, cash flow statement)
• Cash flow (free cash flow, other types of cash flow)
• Profit (net income)
• Cost of capital (WACC)
• Rates of return (IRR, ROI, ROA)
• Dividends and return of capital
• Shareholders
• Creating value
• Risk and return
• Behavioral finance