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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 following:
The study of money and other assets;
The management and control of those assets;
Profiling and managing project risks;
The science of managing money;
As a verb, "to finance" is to provide funds for business.
The activity of finance is the application of a set of techniques that
individuals and organizations (entities) use to manage their financial affairs,
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.
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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. You own 1/100 of the net
difference between assets and liabilities on the balance sheet. 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), etc., 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.
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