An Introduction to Finance – Basic Concepts and Key Terms

An Introduction to Finance – Basic Concepts and Key Terms

Finance is the transformation of economic resources from investors and savers to entities requiring it. 

When put to good use, investors and savers have cash available that can earn returns or interest in the form of dividends. Most common in financial markets, finance provides tools and means by which businesses and other entities can obtain financing for short and long terms. There are two forms of finance: credit and equity. Understanding these forms and how they interact can help you make better financial decisions.
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Credit Finance 

Capital market activities involve borrowing funds from lenders in the form of loans and advances.
This borrowing is done to finance acquisition of fixed assets, production, and expansion of existing facilities. Examples of capital investments include fixed assets like factories, fixed facilities, equipment, and buildings, and goodwill and plant depots. The sources of credit are diverse and can be used for a wide range of purposes. In general, banks lend funds in the form of commercial or secured loans, corporate debt, mortgage, and other types of secured debts.

Equity Finance 

Equity, also known as retained earnings, is financial activity that is invested in company-owned or government securities. 

Examples of capital investments in the stock market include stock loans, preferred stocks, common stocks, treasury bills, and warrants. Financial equity is most widely used in the United Kingdom, Japan, and Canada. It is an integral part of corporate and banking financing and represents about 70% of total finance activity in these countries.

Social Finance 

The impact of social finance on the national economy is profound. 

It impacts health, education, and welfare, all of which have broad effects on overall economic performance. The scope of social finance extends across almost all macroeconomic aspects, including consumer spending, investment, government spending, and output pricing. All of these sectors rely on the efficient operation of social institutions and networks. Public goods and services, such as health care and education, are the primary activities of social finance. Private goods and services, such as housing and real estate, serve to further the public good.

Behavioral Finance 

People make financial decisions based on their own preferences, and this plays a large role in making modern economies grow. 

Behavioral finance seeks to understand how individuals and groups influence financial decisions. Two major components of this field are decision theory and behavioral pricing. Dictators, for example, make major decisions regarding the allocation of resources through behavioral theory. Researchers have developed methods to test theories using random sampling techniques and experimental techniques.

Modern Financial Theory 

The study of modern financial theories is an essential element of modern economics. 

Theory provides the foundation for efficient management of the financial industry. Authors such as economists Amro Elinav and citation ofragian, John Kenneth Galbraith have been instrumental in developing the discipline. Theory is used to provide methods for managing risk, identifying the sources of risk within a firm, and incentive-based pricing of securities, added Brookline Bancorp Assistant Treasurer, Alex Fopiano. He has worked with the company for five years. Hired by the Treasurer of Brookline Bancorp to serve as Treasury Manager for a 2-bank holding company, Alex Fopiano manages a team of treasury analysts and oversees the bank’s investment portfolio. He holds a Master of Science in Finance from McCallum Graduate School of Business at Bentley University. Mr. Fopiano spent two years as Associate Trustee for Boston College High School.

Since the advent of modern business finance, improvements in accounting practices and regulations have made much of the difference in corporate profits. 

Basic concepts of supply and demand, long-term investment patterns, the theory of diminishing returns, and liquidity all fall under the broader purview of business finance. There are many subdisciplines of business finance, including: transactional finance, venture capital, private money markets, international finance, real estate finance, and proprietary trading. Most modern day business firms function without any formal means of internalizing the principles of business finance. Some companies have formalized the principles of business finance by means of exchange programs, shareholder meetings, and annual general meetings.

Finance The study of economic activities that affect the financing of enterprises. 

Business finance pertains to all the various forms of financial activities undertaken by organizations to meet their needs. Some of these include: bank lending, leasing, mergers and acquisitions, inventory, capital budgeting, marketing, sales, distribution, financial planning, executive management, investment, and industrial organization finance. In order to make the best use of these finance tools, it is important to have a thorough knowledge of the economics of the field.

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