Finance is a broad term referring to matters relating to the management, development, and allocation of capital and other financial assets. In particular, it concerns the issues of why and how a person, organization or state acquires the capital required for its everyday operations and how they make use of that capital. The issue of finance has become more important with changes in the economy and financing opportunities have widened.
There are many ways in which the process of financing can be understood and applied. Some of the most common methods are described below. The three main types of finance are personal finance, business finance and public finance. In this article, we discuss the broad concepts underlying each of these types.
Personal finance is the process of managing money for the purpose of obtaining wealth, retirement, or living the lifestyle to which one has become accustomed. Personal investments, such as purchasing real estate, are meant to provide secure sources of income over an extended period of time while allowing the owner to live a comfortable lifestyle. However, these investments do not pay off immediately, so long-term money management is vital. Managing the debt of a home is another example of personal finance.
Business finance includes the planning and policies for the production and sale of goods and services. This includes aspects such as the location and growth of a firm, financial resources dedicated to marketing, research and development, and the overall financial health of a company. Bankrolling for the start-up of a business is an important part of business finance. In this process, bank loans and other forms of credit are obtained to fund start-up costs.
Public finance relates to governmental activities in support of their budget and economy. The concepts and policies of public finance are heavily influenced by modern financial theories and principles. Examples include taxation and social policy.
Insurance companies are among the main providers of financial services to society. Insurance companies offer a variety of insurance products such as insurance on property and casualty, annuities, health insurance, life insurance, etc. A major role in providing money for the nation is done through the insurance companies, with each company needing to have a financial good to support themselves and their operations. Examples of insurance companies in the United States are banks, mutual funds, insurance giants, and credit unions.
Finance in the banking system refers to the activities of the banks. They undertake activities to provide money for loans, purchase of assets, creation of loans, distribution of profits, etc. Banking finance is also included in the overall framework of macroeconomics, which studies how money flows within and between the different economic sectors and affects the overall balance of payments. The most common types of banking transactions are: first-time borrowing, maturity, deposits, and forward investments. Interest rates are decided by bank managers based on their assessment of the risks and rewards associated with the various transactions. They adopt different strategies to influence borrowers and lenders to offer favorable terms.
Another type of finance that is more popular with the general public is savings accounts and investment funds. These can be either a checking account or a savings account, depending on individual requirements. Other notable examples of savings accounts are CD’s (Certificates of Deposit), T-bills, money market, and certificates of deposits. Investments in stocks and bonds are more common among the general population, while mutual funds and real estate property are preferred by upper-class citizens. Finance includes all these various categories and many more, so that the entire concept of finance can be understood as the movement of money from one place to another.