Finance (Meaning and Explanation)

We explain what finance is, its branches of study, types and characteristics. Also, differences between finance and economics.

What are finances?

Finance is an area of economics and business administration that is dedicated to study of obtaining capital resources (that is, financing) and transactions involving your investment and savings considering the risk and uncertainty that this implies. These types of resources (money and other forms of assets) are therefore known as financial resources.

Financial studies are interested in money management. That is, due to the type of decisions that different economic agents (the State, companies or individuals) can take to better manage their resources, betting on their multiplication and the fulfillment of their corresponding objectives.

The world of banking, debt, business investment and the stock market are part of the interests of finance.

The formal study of finance It is divided into two main branches, according to your particular approach:

Corporate finance. They assume the perspective of those who require funds or assets to make an investment, that is, those who need to generate resources.
The valuation of assets. On the contrary, it assumes the perspective of someone who has capital to invest, and wants to do so in the most profitable way possible.

These branches, in turn, are divided into a diverse set of areas of application of financial knowledge.

Features of finance

Broadly speaking, finances are characterized by the following:

deal with the management of money and capital assets: banking and savings, investments (bonds, stocks, etc.), loans, etc.
As an area of knowledge, finance are found between economics, administration and accounting.
handle key concepts as risk, benefit, interest rate, investment costsetc., which serve to describe the functioning of the world of money.
They allow the improving money management both public and private entities, both individuals or families, as well as large corporations.
rely on knowledge from other auxiliary disciplines such as economics, accounting, statistics and mathematics.

Types of finance

Finance can be classified into two large branches: public finance and private finance, each of which in turn has an important set of sub-branches or specialties.

Private finances They are those that seek the optimization of resource management in the case of private or individual entities: SMEs, large corporations, families or individuals. They cover the following areas:
- Personal finances. Those that have to do with individual money management: income, fixed expenses, decision making regarding how to spend money and on what, etc.
- Family finances Understood as the sum of the finances of the individuals who share a home, and who jointly face the expenses that this entails, and make joint plans for the future.
- Corporate finance. Which have to do with the management of the assets of private companies or organizations, that is, their financing decisions, their investment methods and their management decisions.
Public finances. They are those that involve the State or public companies that the State manages, and therefore are managed in different terms than private ones. They cover the following areas:
- Fiscal policy. That is, the way in which a State collects and administers the taxes it obtains from its citizens.
- Public spending. Which has to do with the way the State invests the money it manages and how much money it injects back into society in the form of jobs, purchases, etc.
- Public debt. In the event that a State cannot cover its expenses, and goes into debt with private sectors to keep the state apparatus running.
- Public budget. Which has to do with the projections of future expenses that a State makes, taking into account its financial moment.

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Importance of finances

Given the fundamental principle of every economy, which is that the resources available in the world are finite, while the needs that we must cover with them are infinite; Or, in other words: that money is not enough to do or have everything at the same time, the importance of a field of study such as finance is evident.

Finance allows individuals and organizations to play the game of capitalism in the best way possible, to obtain the necessary resources at the right time, and be able to keep the economic machinery running.

Waste, bad investment, administrative disorder and bad decisions can lead a productive and useful initiative to its ruin. Therefore, resource management is something that no one today can afford to ignore.

Differences between finance and economics

Simply put, Finance is a branch or sector of the vast world of economics. Therefore, both disciplines are interrelated and affect each other.

However, economics has a much broader focus: it studies the ways in which human needs can be satisfied through the production methods available. Finance, seen in this way, focuses only on what is linked to money, and especially what is related to industry and the business world.