Finance is a broad term which includes all matters concerning the science, development, and management of investments and money. It may be studied at the undergraduate or post graduate level. Finance is a branch of mathematics that uses the theory of the economic movement of markets. People who study finance are called financial planners.
The main article of this series will concentrate on the theory of behavioral finance. Behavioral finance basically refers to the way people make financial decisions. This can be done in the market by selling a product that nobody wants or buying a product that everybody else does not like. The main question is; why did you make such a decision? For most people it is because they felt that the price/value of the product was worth the amount of risk they had to take.
There are many different ways to approach finance. Most modern day finance theories describe the financial markets as the sum total of all financial assets and liabilities. Money is the source of wealth creation and the only thing which is able to prevent financial disaster from happening is sound money. People invest money into financial instruments such as bonds, stocks, mutual funds, and other financial securities. All of these are merely ways to create wealth by using the power of the credit market.
Finance is an important topic because it is at the core of how we create value. It is impossible to fully define value because it is relative. Therefore, the only true way to determine what value is through the process of financial services. A financial services firm researches the market, looks for investments that will increase the company’s wealth, then provides investment management and capital advice. The purpose of the company is to increase shareholder wealth, take advantage of tax laws, and provide financial services to businesses and corporations. The main function of the financial services firm is to create and manage a diversified portfolio of capital so that it is not dependent on any one sector.
A number of institutions provide financing and capital market activities to small businesses and corporations. They typically use a number of different techniques, such as borrowing money from banks, issuing commercial paper, offering various forms of personal securities, creating securities contract, borrowing money from other investors, providing mortgage banking, and making various leveraged stock investments. As well, there are various types of derivatives, including forward contracts, option contracts, swap agreements, credit default swaps, interest rate swaps, and foreign exchange (forex) agreements. The entire scope of finance is vast and complex, and most banking and financial services institutions offer a wide array of financial products.
Today’s modern financial system is quite complex. In order to stay competitive and to effectively manage risk, banking and financial services firms must constantly look for new innovative investment opportunities. Finance plays an important role in the economic system and therefore, finance managers must be able to understand all of the various techniques of financial engineering. If you are interested in a career in banking and financial services, then you will definitely want to learn more about some of the different investment techniques used by banking and other financial institutions.