Finance
There are many ways to define finance. However, there is an indisputable fact that it is difficult to give a clear and concise definition. Finance grew out of economics and accounting. The notion developed by economists that an asset’s value is based on the future cash flows the asset will provide, and accountants provided information regarding the likely size of those cash flows. Finance then grew out of and lies between economics and accounting, so people who work in finance need knowledge of those two fields.
In universities, Finance is generally divided into three areas: (1) financial management, (2) capital markets, and (3) investments.
Financial management,also called corporate finance, focuses on decisions relating to how much and what types of assets to acquire, how to raise the capital needed to buy assets, and how to run the firm so as to maximize its value. The same principles apply to both for-profit and not-for-profit organizations; and as the title suggests, much of this book is concerned with financial management.
Capital marketsrelate to the markets where interest rates, along with stock and bond prices, are determined. Also studied here are the financial institutions that supply capital to businesses. Banks, investment banks, stockbrokers, mutual funds, insurance companies, and the like bring together "savers" who have money to invest and businesses, individuals, and other entities that need capital for various purposes. Governmental organizations such as the Federal Reserve System, which regulates banks and controls the supply of money, and the SEC, which regulates the trading of stocks and bonds in public markets, are also studied as part of capital markets.
Investmentsrelate to decisions concerning stocks and bonds and include a number of activities: (1) Security analysis deals with finding the proper values of individual securities. (2) Portfolio theory deals with the best way to structure portfolios, or "baskets," of stocks and bonds. Rational investors want to hold diversified portfolios in order to limit risks, so choosing a properly balanced portfolio is an important issue for any investor. (3) Market analysis deals with the issue of whether stock and bond markets at any given time are "too high," "too low," or "about right." Behavioral finance, where investor psychology is examined in an effort to determine if stock prices have been bid up to unreasonable heights in a speculative bubble or driven down to unreasonable lows in a fit of irrational pessimism, is a part of market analysis.
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