Finance: What is it, definition and concept

Finance corresponds to an area of the economy that studies the obtaining and management of money and capital, that is, financial resources. It studies both the obtaining of these resources (financing), as well as the investment and saving of them.

Finance studies how economic agents (companies, families or the State) must make investment, saving and spending decisions under conditions of uncertainty. When choosing, agents can opt for various types of financial resources such as: money, bonds, stocks or derivatives, including the purchase of capital goods such as machinery, buildings and other infrastructure. See difference between saving and investment .

The financial intermediaries are the agents dedicated to putting in contact the two parts of the finances, the savers and those who need financing.

Finances help control income and expenses, both for the Government, for companies, and for each one of us. Having good control of finances allows us to better manage our resources, knowing in detail all income and expenses, to have greater control over themselves.

Finance study areas

Finance studies a wide range of transactions related to the optimal management of financial resources. This areas of study include:

  • The study of the profitability of investments : When is it convenient or not to invest in a project or how to choose between several projects.
  • How to properly manage debt : Keep debt under control and take advantage of its benefits to grow in the future.
  • Keep changes in the value of money over time under control : Control the loss of value of money in scenarios with inflation .
  • Determining the prices of tangible and intangible assets : Valuing assets based on their risk and expected rate of return (see for example IRR ).

Types of finance

Finances can be divided into four large groups:

  • Corporate finance : It focuses on the study of obtaining and managing the resources of companies. Among his areas of study are:
    • In which productive projects you should invest.
    • When to pay dividends.
    • What are the optimal financing options.
  • Personal finances : Refers to the study of obtaining and managing the resources of families or individuals. Among his areas of study are:

    • How to choose a profitable career or profession.
    • Optimal management of labor income and debt.
    • Making investment and saving decisions (such as when to buy a house or where to put our savings).
  • Public finances: It deals with the study of obtaining and managing the financial resources of State institutions. Among his areas of study are:

    • Obtaining resources through taxes.
    • Investing in profitable public projects.
    • The choice of the mechanisms for redistribution of resources.
    • Proper management of the government deficit and surplus.
  • International finance : Refers to the study of financial transactions at the international level. Among his areas of study are:

    • Debt abroad.
    • The effects of exchange rate fluctuation on profitability.
    • Foreign capital movements.
    • The inherent risk of investing in a certain country.

Finance Resources

To study finances there are several tools that manage and analyze financial resources and the use made of them. Here are some examples of these resources:

  • Accounting: It is a financial resource that is used to manage the  expenses  and income of a company. It is a key tool to know in what situation a company is and, with this documentation, to be able to establish the necessary strategies in order to improve its economic performance. Accounting can be used to manage any group: corporate finance, personal finance, public finance, and international finance.
  • Behavioral finance : They are the field that analyzes finance from a psychological point of view . Describe how people behave and how they make decisions. It was born from the union of psychology, traditional economics and neuroeconomics .

Origin of finances

The origin of finance can be found around the 15th century, with the rise of capitalism . It is at this time when commercial banks that offer intermediation, loan and savings services begin to develop.

Over time, financial institutions and their products have evolved and modernized. New intermediaries other than traditional banks have appeared (such as portfolio management companies , collective investment institutions, etc.) and also new financial products that offer a multitude of options to customers.

Regarding its theoretical development, it was not until the 20th century that finance became an area of study in its own right. Its origin can be found in the works of Irving Fisher in 1897 where he refers to finance as a new discipline.

Its scope of study has been refined over time, with the development of theories that attempt to explain the optimal determination of asset prices, expected profitability, decisions in uncertain scenarios, etc.

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