Do you have very limited knowledge of finance? Well, here is your chance to increase your knowledge. We have created this excellent guide only for you. With the help of the knowledge provided in this blog, you can write the best business finance assignment or corporate finance assignment.
Definition of Finance
What exactly is finance? Finance can be defined as the management of money that involves activities like saving, lending, investing, forecasting, and borrowing.
In other words, finance is basically the study of the management of money. The term ‘finance’ also describes the process of how funds are acquired. The term covers many things including the making, supervising, studying money, credit, assets, investments, liabilities, and banking to build the financial systems.
Some finance-related activities are as follows:
- Personal money saving in savings accounts which have high interest rates
- Giving money to people as a loan or lending the money
- Making an investment using personal money into bonds, stocks, etc.
- On behalf of a company, borrowing money from investors or banking institutions
What are Financial Services?
The government bodies, businesses, and individuals require funding to function, which is why the field of finance is often divided into three categories likely personal, corporate and public finance.
- Personal Finance
Analysing a family or an individual’s latest financial position, and developing strategies for future needs are involved in financial planning. Personal finance can be seen as a personal activity that is based on the amount a person earns, what living requirements does he/she have, what are his/her individual goals and desires, etc.
An example of this can be a person’s necessity to save for retirement expenses. This means that one should invest sufficient money so that their long term plans can be properly funded. This is one kind of financial management decision that falls into the category of personal finance.
Other activities that can be considered as personal finance are buying products like insurance, different kinds of investments, mortgages, and credit cards. A segment of personal account also includes banking that involves saving accounts, online payment services like Paypal, etc.
- Corporate Finance
This type of finance includes financial activities that are connected to running a corporation or organisation. These corporations generally have separate divisions that look after the financial activities. Corporate finance can be seen as the management of the funding of a company. It also includes the management of the company’s revenue sources, capital uses, and the company’s profit and loss statement. Few examples of what includes in corporate finance are given below:
- Capital structure
- Balance sheet
- Cost of capital
- Cash flow statement
- Income statement
- Return on investment
An example of a financial decision that comes under the category of corporate finance is as follows:
A company attempting to budget their capital and take decisions regarding which project to finance and which to keep for later for the growth of the company.
- Public Finance
From the perspective of the government, finance involves managing the national budget of the country, the treasury department, the central bank, as well as, different government levels. The focus of public finance remains on gathering tax revenue and use that money for different national programs and services like building hospitals, roads, and social security.
Other than this, tax, debt issuance policies, budgeting, spending, and everything that has an effect on the way the government pays for public services is included in public finance.
By monitoring the resources allocation, economy’s stabilisation, and income distribution, the government can help to avoid market failure. The government ensures regular funding via taxation. A government also gets its finance by borrowing from the government of other nations, banks, insurance companies, etc.
Other than looking after the management of the money in their daily operations, the government also has other bigger social responsibility. It also has to ensure an equitable income distribution for its citizens, and pass policies that will bring a stable economy.
Some examples of public finance are as follows:
- National debt
- Income tax
- Social security and insurance
- National budget
- Sales tax
- Money supply
- Spending on infrastructure
- National debt
- Gross national product
- International trade
Various Theories of Finance
The role played by finance in the market has been explained by several economists with the help of various finance theories. The finance theory includes studying the different ways through which individuals and businesses increase their money, and how different projects are given money while taking into consideration the related risk factors.
There are several theories of finance that provide different approaches to the main finance theory. Some of these theories are:
- Rational choice theory
- Black model
- Monte Carlo option model
- Arbitrage pricing theory
- Binomial options pricing model
- Prospect theory
- International Fisher effect
- Legal origins theory
- Cumulative prospect theory
- Gordon model
In the arbitrage pricing theory, the asset pricing’s theory is addressed. In order to maintain the proper pricing of shares, it is necessary to have proper asset pricing. According to this theory, the return expected from a financial asset can be portrayed in the form of a linear function of different theoretical market indices and macro-economics.
In the case of the Prospect theory, the alternatives with uncertain outcomes are considered. By nature, this model is descriptive and it tries to present real-life choices.
This branch of Economics examines the application and distribution of resources into the markets where decisions are taken in several uncertainties. This field puts its focus on making decisions when the two considerations hold much importance. The application of this subject varies from investment decisions to the stock market, and ranges from insurances to savings.
In other words, financial economics applies the economic theory to assess how risk or uncertainty, information, time, and opportunity costs can generate incentives for a specific decision. In this field, sophisticated models are created to examine the variables that have an impact on a particular decision. The concentration of financial economics remains on the trade exchanges where monetary benefits are involved.
When it comes to financial mathematics, mathematical methods are applied to solve financial problems. This field derives different tools from various things like statistics, probability, economic theory, stochastic processes, etc. In general, the institutions that use financial mathematics are corporate treasuries, investment banks, insurance companies, commercial banks, regulatory agencies and hedge funds.
With the help of these methods, problems related to risk management, portfolio structuring, scenario simulation, and derivative securities valuation are addressed. Industries like manufacturing, energy, etc. also apply the methods of financial mathematics.
The term “experimental finance” can be defined as the method of building various market conditions in order to assess the traders’ habits in every situation. In order to apply experimental finance within the setting of a stock market, trading simulations can be set up and different theories will be applied.
One application of this data is that it can be used to make a prediction regarding how the stocks will be valued in case the situations become real.
Behavioural Finance is a sub-field of behavioural economics. In behavioural finance, theories based on psychology are proposed to describe the irregularities of stock markets. One example can be a significant rise or fall in the stock price.
The purpose or aim of behavioural finance is to detect and comprehend the reason behind people making specific financial decisions. A common assumption in this field is that the structure of information and the market participants’ characteristics both affect the investment decisions of individuals.
Here is your complete guide to Finance that covers all the aspects of the field. Read it to enhance your knowledge and write excellent assignments.
Problem Faced by students while writing Finance assignments?
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