A Short Primer on Finance
Finance is a broad term encompassing various things regarding the study, production, and management of funds and investments. In layman’s terms, finance is concerned with financial institutions and businesses that engage in the process of creating and managing wealth. There are two parts to the study and categorization of finance, which are management and investment.
Managerial finance is concerned with allocation of resources in pursuit of economic goals. The field of managerial economics draws on many disciplines including statistical science, decision theory, decision sciences, mathematics, and the business planning field. Managerial finance develops models of the financial markets as well as methods to assist managers in making decisions regarding allocation of resources. The main areas of focus for this discipline include risk management, financial economics, and the economic theory of the firm.
Investment banking refers to the practice of trading securities for the purpose of raising capital. Securities trading are primarily conducted over short term periods, with long term investment focusing on the long term growth of portfolios. Investment banking then turns these investments into financial instruments, such as bonds, stocks, and mutual funds. While banks provide the funding, they do not actually create the financial products themselves; however, they do facilitate the process through acting as intermediaries. Traders in securities exchanges create and manage accounts, as well as execute orders for these securities.
All forms of finance are influenced by two main economic theories: risk and efficiency. According to risk theory, the value of any asset increases or decreases depending on the probability of its return. Efficiency theory states that the value of any asset is determined by its ability to provide income. All financial instruments, including bonds, stocks, mutual funds, money market funds, treasury bills, CDs, and mortgage backed securities (MBS) are categorized according to the extent to which they are riskier or efficient.
Banks are large financial institutions that borrow funds and issue loans. All types of banking products are included in finance. Banking provides support for households, businesses, governments, and other entities through lending, investing, and other forms of financial transactions. Some examples of types of banking products are savings and loans, manufacturing and commercial banks, commercial real estate banking, and the banking industry itself. All banking products impact the economy in one way or another.
The financial services sector includes insurance, investment, banking, and the credit industry. Investing refers to the buying and selling of securities, such as bonds, stocks, and mutual funds, with an emphasis on making money from buying and selling financial instruments. All financial services, including investment and banking, have a role in the economy.