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Definitions
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Dictionary > Definitions > Economy > Finance
Finance
Definition
Finance studies and addresses the ways in which individuals, businesses, and organizations raise, allocate, and use monetary resources over time, taking into account the risks entailed in their projects. The term "finance" may thus incorporate any of the
Description
The activity of finance is the application of a set of techniques that
individuals and organizations (entities) use to manage their money, particularly
the differences between income and expenditure and the risks of their
investments.
An entity whose income exceeds its expenditure can lend or invest the excess
income. On the other hand, an entity whose income is less than its expenditure
can raise capital by borrowing or selling equity claims, decreasing its
expenses, or increasing its income. The lender can find a borrower, a financial
intermediary, such as a bank or buy notes or bonds in the bond market. The
lender receives interest, the borrower pays a higher interest than the lender
receives, and the financial intermediary pockets the difference.
A bank aggregates the activities of many borrowers and lenders. A bank accepts
deposits from lenders, on which it pays the interest. The bank then lends these
deposits to borrowers. Banks allow borrowers and lenders, of different sizes, to
coordinate their activity. Banks are thus compensators of money flows in space.
A specific example of corporate finance is the sale of stock by a company to
institutional investors like investment banks, who in turn generally sell it to
the public. The stock gives whoever owns it part ownership in that company. If
you buy one share of XYZ Inc, and they have 100 shares outstanding (held by
investors), you are 1/100 owner of that company. Of course, in return for the
stock, the company receives cash, which it uses to expand its business in a
process called "equity financing". Equity financing mixed with the sale of bonds
(or any other debt financing) is called the company's capital structure.
Finance is used by individuals (personal finance), by governments (public
finance), by businesses (corporate finance), as well as by a wide variety of
organizations including schools and non-profit organizations. In general, the
goals of each of the above activities are achieved through the use of
appropriate financial instruments, with consideration to their institutional
setting.
Finance is one of the most important aspects of business management. Without
proper financial planning a new enterprise is unlikely to be successful.
Managing money (a liquid asset) is essential to ensure a secure future, both for
the individual and an organization.
Financial mathematics is a main branch of applied mathematics concerned with the
financial markets. Financial mathematics is the study of financial data with the
tools of mathematics, mainly statistics. Such data can be movements of
securities�stocks and bonds etc.�and their relations. Another large subfield is
insurance mathematics.
Quantitative Behavioral Finance is a new discipline that uses mathematical and
statistical methodology to understand behavioral biases in conjunction with
valuation. Some of this endeavor has been lead by Gunduz Caginalp (Professor of
Mathematics and Editor of Journal of Behavioral Finance during 2001-2004) and
collaborators including Vernon Smith (2002 Nobel Laureate in Economics), David
Porter, Don Balenovich, Vladimira Ilieva, Ahmet Duran, Huseyin Merdan). Studies
by Jeff Madura, Ray Sturm and others have demonstrated significant behavioral
effects in stocks and exchange traded funds.
The research can be grouped into the following areas:
1. Empirical studies that demonstrate significant deviations from classical
theories.
2. Modeling using the concepts of behavioral effects together with the
non-classical assumption of the finiteness of assets.
3. Forecasting based on these methods.
4. Studies of experimental asset markets and use of models to forecast
experiments.
Depreciation is the decrease in the value of an asset due to wear and tear or
obsolescence. It is calculated yearly to ensure realistic book values for
assets.
Author
Aziz
Author Email
azizjipsbd@yahoo.com
References
Definitions to be consulted