Finance and Investment
Finance is the management of money and other assets by individuals, private institutions, and public entities such as governments and large companies. It is generally divided into three subcategories: personal finance, public finance, and corporate finance. Personal finance, as its name suggests, is the management of money by individuals. It generally centers on securing the individual’s financial future under the unstable economy and unanticipated events. Alternatively, public finance focuses on how public entities manage their money. Among the primary concerns of public finance are the budgeting process of public entities, their required expenditure and sources of revenue, and debt issuance for public works projects. Lastly, corporate finance primarily deals with providing funds to a corporation’s activities and analyzing a company’s profitability and risks while attempting to maximize its assets and stock value.
In finance, investment is the act of putting money into something with the prospect that it will produce income or be sold at a higher price over time. Investment typically refers to a long-term outlook and generally involves some sort of risk. It can take several forms with varying amount of return and degree of risks. For instance, government bonds involve much lower risk than international stocks but the latter results to higher rewards.
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In order to raise money for different reasons such as paying off debt, financing expansion, and providing operating capital, businesses typically sell stock shares. Once an investor purchases a share of stock, he gets a share of ownership in the company and as a result will share in a portion of any earnings and growth of the company. In some cases, dividends from the company’s profit are paid to shareholders.
The primary reason people invest in stocks is to seek capital appreciation and growth. In general, stocks present a higher average annual rate of return in a long term as compared to other investments such as bonds and cash alternatives. Stocks, however, also characteristically presents a higher risk than the two.
Bonds are traded in large volumes daily. However, since it generally gives lower return than other investments it is often underestimated. As compared to more popular investments such as stocks, real estate, and precious metals though, bonds presents considerably less risk. When an investor purchases a bond, he’s effectively loaning money to the bond issuer. Bond issuers are usually government agencies or private corporations in need of money to fund a program or finance a venture. The investor will then be paid with interest payments at regular intervals, typically according to a fixed annual rate.
A financial transaction occurs when a financial asset is created or transferred. Examples of financial transactions are loan granted by a bank to a company, equity stock issued by a company, the purchase of debentures in the secondary market and the sale of goods on credit. While this list can be easily extended, the point is financial transactions are very pervasive throughout the economic system. Hence, financial markets that exist wherever financial transactions occur are equally pervasive.
Financial markets are generally divided into two classes: money market and capital market. Money market deals in short-term debt, in contrast to the capital market that deals in long-term debt and stock (equity and preference). A well-developed money market uses a broad range of financial instruments (treasury bills, bills of exchange etc). This channels savings into productive investments like working capital and promotes financial mobility in the form of inter-sectoral flow of funds.
Business to business finance is a term that implies a financial transaction from one business to another. For example, if someone wants to open a hardware store, that person as a business might have to take advantage of a loan from another business – a bank, for example. There are many other examples. Any entity can loan another entity money. Also, if a business needs to purchase a product or service from another company, the purchasing business can get financing for the express purpose of making that necessary purchase. Different rates and systems apply to individuals and businesses, so therein lies the distinction.
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