Meanings of Finance

Finance is defined as the management of money and includes activities such as

investing, borrowing, lending, budgeting, saving, and forecasting. There are three
main types of finance: (1) personal, (2) corporate, and (3) public/government.

Examples

The easiest way to define finance is by providing examples of the activities it

includes. There are many different career paths and jobs that perform a wide
range of finance activities. Below is a list of the most common examples:

 Investing personal money in stocks, bonds, or guaranteed investment

certificates (GICs)
 Borrowing money from institutional investors by issuing bonds on behalf of
a public company
 Lending money to people by providing them a mortgage to buy a house
with
 Using Excel spreadsheets to build a budget and financial model for a
corporation
 Saving personal money in a high-interest savings account
 Developing a forecast for government spending and revenue collection

Financial Management
Financial Management means planning, organizing, directing and controlling the
financial activities such as procurement and utilization of funds of the enterprise.
It means applying general management principles to financial resources of the
enterprise.

Scope/Elements

1. Investment decisions includes investment in fixed assets (called as capital

budgeting). Investment in current assets are also a part of investment
decisions called as working capital decisions.
2. Financial decisions - They relate to the raising of finance from various
resources which will depend upon decision on type of source, period of
financing, cost of financing and the returns thereby.
3. Dividend decision - The finance manager has to take decision with regards
to the net profit distribution. Net profits are generally divided into two:
a. Dividend for shareholders- Dividend and the rate of it has to be
decided.
 b. Retained profits- Amount of retained profits has to be finalized which
will depend upon expansion and diversification plans of the
enterprise.

Finance Careers
A definition of finance would not be complete without exploring the
career options associated with the industry. Below are some of the most
popular career paths:

 Commercial banking
 Personal banking (or private banking)
 Investment banking
 Wealth management
 Corporate finance
 Mortgages / lending
 Accounting
 Financial planning
 Treasury
 Audit
 Equity research
 Insurance

Forms of business organization

there are 4 main types of business organization: sole proprietorship, partnership,
corporation, and Limited Liability Company,

Sole Proprietorship
The simplest and most common form of business ownership, sole
proprietorship is a business owned and run by someone for their own
benefit. The business’ existence is entirely dependent on the owner’s
decisions, so when the owner dies, so does the business.

Advantages of sole proprietorship:

 All profits are subject to the owner
 There is very little regulation for proprietorships
 Owners have total flexibility when running the business
 Very few requirements for starting—often only a business license

Disadvantages:

 Owner is 100% liable for business debts

 Equity is limited to the owner’s personal resources
 Ownership of proprietorship is difficult to transfer
 No distinction between personal and business income

Partnership
These come in two types: general and limited. In general partnerships,
both owners invest their money, property, labor, etc. to the business and
are both 100% liable for business debts. In other words, even if you
invest a little into a general partnership, you are still potentially
responsible for all its debt. General partnerships do not require a formal
agreement—partnerships can be verbal or even implied between the two
business owners.

Limited partnerships require a formal agreement between the partners.

They must also file a certificate of partnership with the state. Limited
partnerships allow partners to limit their own liability for business debts
according to their portion of ownership or investment.

Advantages of partnerships:

 Shared resources provides more capital for the business

 Each partner shares the total profits of the company
 Similar flexibility and simple design of a proprietorship
 Inexpensive to establish a business partnership, formal or informal
 Disadvantages:

 Each partner is 100% responsible for debts and losses

 Selling the business is difficult—requires finding new partner
 Partnership ends when any partner decides to end it

Corporation
Corporations are, for tax purposes, separate entities and are considered
a legal person. This means, among other things, that the profits
generated by a corporation are taxed as the “personal income” of the
company. Then, any income distributed to the shareholders as
dividends or profits are taxed again as the personal income of the
owners.

Advantages of a corporation:

 Limits liability of the owner to debts or losses

 Profits and losses belong to the corporation
 Can be transferred to new owners fairly easily
 Personal assets cannot be seized to pay for business debts

Disadvantages:

 Corporate operations are costly

 Establishing a corporation is costly
 Start a corporate business requires complex paperwork
 With some exceptions, corporate income is taxed twice

Limited Liability Company (LLC)

Similar to a limited partnership, an LLC provides owners with limited
liability while providing some of the income advantages of a partnership.
 Essentially, the advantages of partnerships and corporations are
combined in an LLC, mitigating some of the disadvantages of each.

Advantages of an LLC:

 Limits liability to the company owners for debts or losses

 The profits of the LLC are shared by the owners without double-
taxation

Disadvantages:

 Ownership is limited by certain state laws

 Agreements must be comprehensive and complex
 Beginning an LLC has high costs due to legal and filing fees

Goals of the corporation

Corporate goals and objectives succinctly describe a company's mission and
values. A business sets expectations for employees, investors and customers by
defining clear goals. Common examples typically include customer loyalty, profit,
growth, leadership and commitment to employees, customers and the community

Examples of Corporate Goals

Corporate goals and objectives succinctly describe a company’s mission and values. A
business sets expectations for employees, investors and customers by defining clear goals.
Common examples typically include customer loyalty, profit, growth, leadership and
commitment to employees, customers and the community. Without goals, a business usually
lacks direction and purpose.

Agency relationships
An agency relationship is a fiduciary relationship, where one person (called the
“principal”) allows an agent to act on his or her behalf. The agent is subject to the
principal's control and must consent to her instructions

Three basic types of agency relationships?

As these questions suggest, agency law often involves three parties—the
principal, the agent, and a third party. It therefore deals with three different
relationships: between principal and agent, between principal and third party, and
between agent and third party
Functions of Financial Manager
 The functions of Financial Manager are discussed below:
1. Estimating the Amount of Capital Required:
This is the foremost function of the financial manager.
Business firms require capital for:

(i) purchase of fixed assets,

(ii) Meeting working capital requirements, and

(iii) Modernization and expansion of business.

The financial manager makes estimates of funds required

for both short-term and long-term.

2. Determining Capital Structure:

Once the requirement of capital funds has been determined,
a decision regarding the kind and proportion of various
sources of funds has to be taken. For this, financial manager
has to determine the proper mix of equity and debt and
short-term and long-term debt ratio. This is done to achieve
minimum cost of capital and maximize shareholders wealth.

3. Choice of Sources of Funds:

Before the actual procurement of funds, the finance
manager has to decide the sources from which the funds are
to be raised. The management can raise finance from
various sources like equity shareholders, preference
shareholders, debenture- holders, banks and other financial
institutions, public deposits, etc.

4. Procurement of Funds
The financial manager takes steps to procure the funds
required for the business. It might require negotiation with
creditors and financial institutions, issue of prospectus, etc.
The procurement of funds is dependent not only upon cost
of raising funds but also on other factors like general market
conditions, choice of investors, government policy, etc.

5. Utilization of Funds:
The funds procured by the financial manager are to be
prudently invested in various assets so as to maximize the
return on investment: While taking investment decisions,
management should be guided by three important
principles, viz., safety, profitability, and liquidity.

6. Disposal of Profits or Surplus:

The financial manager has to decide how much to retain for
ploughing back and how much to distribute as dividend to
shareholders out of the profits of the company. The factors
which influence these decisions include the trend of
earnings of the company, the trend of the market price of its
shares, the requirements of funds for self- financing the
future programmers and so on.
7. Management of Cash:
Management of cash and other current assets is an
important task of financial manager. It involves forecasting
the cash inflows and outflows to ensure that there is neither
shortage nor surplus of cash with the firm. Sufficient funds
must be available for purchase of materials, payment of
wages and meeting day-to-day expenses.

8. Financial Control:

Evaluation of financial performance is also an important

function of financial manager. The overall measure of
evaluation is Return on Investment (ROI). The other
techniques of financial control and evaluation include
budgetary control, cost control, internal audit, break-even
analysis and ratio analysis. The financial manager must lay
emphasis on financial planning as well.

Financial Statements
 Financial statements are reports prepared by a company's management to

present the financial performance and position at a point in time. A general-

purpose set of financial statements usually includes a balance sheet,

income statements, statement of owner's equity, and statement of cash flows

Balance sheet
A balance sheet is a statement of the financial position of a business that lists the

assets, liabilities, and owner's equity at a particular point in time. In other words,

the balance sheet illustrates your business's net worth.

Income statement

The Income Statement is one of a company's core financial statements that

shows their profit and loss. The P&L statement shows a company's ability to

generate sales, manage expenses, and create profits. over a period of time.

Cash flow statement

A cash flow statement is a financial statement that provides aggregate data

regarding all cash inflows a company receives from its ongoing operations and

external investment sources. It also includes all cash outflows that pay for

business activities and investments during a given period

Statement of Retained Earnings, or Statement of Owner's

Equity

The Statement of Retained Earnings, or Statement of Owner's Equity, is an

important part of your accounting process. Retained earnings represent the

amount of net income or profit left in the company after dividends are paid out to

stockholders. The company can then reinvest this income into the firm]

  Income Statement Vs Cash Flow Statement

Income Statement reflects the net profit or loss from the business activities
for a particular accounting period. On the other hand, cash flow
statement keeps a record of overall changes in the cash and cash equivalents
of the business organization during a particular financial year.

Financial Statement refers to the official record of the financial activities and
the overall position of the business entity. It is the final destination of the
whole process of accounting, which comprises of the income statement,
balance sheet, and cash flow statement. It is helpful to the interested parties in
knowing the profitability, liquidity, performance and position of business.
Check out the article provided to you, as it breaks down all the important
differences between income statement and cash flow statement.

Differences between Income Statement and Cash Flow Statement

The points given below are noteworthy, so far as the difference between cash
flow and income statement is concerned:

1. The major difference between an income statement and cash flow

statement is cash, i.e. the income statement is based on an accrual basis
(due or received) while the cash flow statement is based on the actual
receipt and payment of cash.
2. The income statement is classified into two main activities operating
and non-operating, whereas the cash flow statement is divided into
three activities operating, investing and financing.
3. The income statement is helpful in knowing the profitability of the
company, but the cash flow statement is useful in knowing the liquidity
and solvency of business which determines the present and future cash
flows.
4. Incomes statement is based on accrual system of accounting, wherein
incomes and expenses of a financial year are considered. On the other
hand, cash flow statement is based on cash system of account, which
only considers actual money inflows and outflows in a particular
financial year.
5. The income statement by to taking into account various records and
ledger accounts. As against this, cash flow statement is prepared
considering the income statement and balance sheet.
6. Depreciation is considered in the income statement, but the same is
excluded from cash flow statement because it is a non-cash item.
 Personal taxes

Individual income tax is also referred to as personal income tax and is levied

on wages, salaries, and other types of income. This tax is usually a tax the state

imposes. Because of exemptions, deductions, and credits, most individuals do not

pay taxes on all of their income

Corporate taxes
A corporate tax, also called corporation tax or company tax, is a

direct tax imposed by a jurisdiction on the income or capital of corporations or

analogous legal entities. Many countries impose such taxes at the national level, and a

similar tax may be imposed at state or local levels.

Efficient Market Hypothesis and its

Implication
The efficient-market hypothesis (EMH) is a hypothesis in financial economics that
states that asset prices reflect all available information. A direct implication is
that it is impossible to "beat the market" consistently on a risk-adjusted basis
since market prices should only react to new information. Since risk adjustment
is central to the EMH, and yet the EMH does not specify a model of risk, the EMH
is untestable.[1] As a result, research in financial economics since at least the
1990s has focused on market anomalies, that is, deviations from specific models
of risk.[2]
The idea that financial market returns are difficult to predict goes back
to Bachelier (1900),[3] Mandelbrot (1963),[4] and Samuelson (1965).[5] Eugene
Fama is closely associated with the EMH, in part due to his influential 1970 review
of the theoretical and empirical research (Fama 1970). [1]
Despite its lack of testability, the EMH still provides the basic logic for modern
risk-based theories of asset prices. Indeed, modern frameworks such
as consumption-based asset pricing and intermediary asset pricing can be
thought of as the combination of a model of risk with the hypothesis that markets
are efficient.[6]
Efficient Markets Hypothesis
This principle is called the Efficient Market Hypothesis (EMH), which asserts that
the market is able to correctly price securities in a timely manner based on the
latest information available. Based on this principle, there are
no undervalued stocks to be had, since every stock is always trading at a price
equal to its intrinsic value.

There are several versions of EMH that determine just how strict the assumptions
needed to hold to make it true are. However, the theory has its detractors, who
believe the market overreacts to economic changes, resulting in stocks becoming
overpriced or underpriced, and they have their own historical data to back it up. 

For example, consider the boom (and subsequent bust) of the dot-com bubble in
the late 1990s and early 2000s. Countless technology companies (many of which
had not even turned a profit) were driven up to unreasonable price levels by an
overly bullish market. It was a year or two before the bubble burst, or the market
adjusted itself, which can be seen as evidence that the market is not entirely
efficient—at least, not all of the time.

In fact, it is not uncommon for a given stock to experience an upward spike in a

short period, only to fall back down again (sometimes even within the same
trading day). Surely, these types of price movements do not entirely support the
efficient market hypothesis.

Built-In Accuracy?
The implication of EMH is that investors shouldn't be able to beat the market
because all information that could predict performance is already built into the
stock price. It is assumed that stock prices follow a random walk, meaning that
they're determined by today's news rather than past stock price movements.

It is reasonable to conclude that the market is considerably efficient most of the

time. However, history has proved that the market can overreact to new
information (both positively and negatively). As an individual investor, the best
thing you can do to ensure you pay an accurate price for your shares is to
research a company before purchasing their stock and analyze whether or not the
market appears to be reasonable in its pricing.

The Functions of Financial Markets

 Financial Markets have different roles to play which include price determination,
funds mobilization, risk sharing, easy access, liquidity, capital formation and
reduction in transaction costs and provision of the required information, etc.

Creating Money
Money creation, or money issuance, is the process by which the money supply of
a country, or of an economic or monetary region, is increased. ... Central banks
monitor the amount of money in the economy by measuring the so-called
monetary aggregates.
Transfer of money
 Moving money electronically or physically to a specified account or person from another
specified account or person. Western Union is a company that transfers money.

Accumulating Saving
Savings refer to the part of the disposable income that has not been spent or being
consumed but is invested or accumulated either directly, such as in capital investment or
indirectly, such as through purchase of securities. Accumulated Savings are like surplus
income that are or are not yet assessed for any purpose.

Lending & Investing Saving

Lending (also known as "financing") in its most general sense is the temporary

giving of money or property to another person with the expectation that it will be

repaid. In a business and financial context, lending includes many different types

of commercial loans.

Saving and investing often are used interchangeably, but there is a difference.

1. Saving is setting aside money you don't spend now for emergencies or for
a future purchase. ...
2. Investing is buying assets such as stocks, bonds, mutual funds or real
estate with the expectation that your investment will make money for you.

Marketing Financial Assets

A financial asset is a non-physical asset whose value is derived from a

contractual claim, such as bank deposits, bonds, and stocks. Financial assets are

usually more liquid than other tangible assets, such as commodities or real

estate, and may be traded on financial markets.

Examples of financial assets?

Cash, stocks, bonds, mutual funds, and bank deposits are all are examples of
financial assets. Unlike land, property, commodities, or other tangible
physical assets, financial assets do not necessarily have inherent physical worth
or even a physical form

Transferring Financial Assets

It includes a new section that addresses the transfer of financial assets in a
commercial mortgage-backed securities issuance under the credit risk
retention

Financial Markets

Financial markets refer broadly to any marketplace where the trading of securities

occurs, including the stock market, bond market, forex market, and

derivatives market, among others. Financial markets are vital to the smooth

operation of capitalist economies.

Money Market
Money market is for short term funds, where the investors who intend to invest
for not longer than a year enters into a transaction. This market deals in monetary
assets such as treasury bills, commercial paper, and certificate of deposits. The
maturity period for all these instruments doesn’t exceed a year.

Since these instruments have low maturity period, they carry a lower risk and a
reasonable rate of return for the investors, generally in the form of interest.

Capital Market
Capital market refers to the market where instruments with medium- and long-
term maturity are traded. This is the market where the maximum interchange of
money happens, it helps companies get access to money through equity capital,
preference share capital, etc. and it also provides investors access to invest in the
equity share capital of the company and be a party to the profits earned by the
company.

This market has two verticals:

 Primary Market – Primary Market refers to the market, where the company

lists security for the first time or where the already listed company issues

fresh security. This market involves the company and the shareholders to

transact with each other. The amount paid by shareholders for the primary

issue is received by the company. There are two major types of products for

the primary market, viz. Initial Public Offer (IPO) or Further Public Offer

(FPO).

 Secondary Market – Once a company gets the security listed, the security

becomes available to be traded over the exchange between the investors.

The market that facilitates such trading is known as the secondary market or

the stock market.

Market Mortgage is a lending platform, working in partnership with retail

lenders to provide high-LTV mortgages more efficiently to prime borrowers

The derivatives market is the financial market for derivatives, financial

instruments like futures contracts or options, which are derived from other forms
of assets. The market can be divided into two, that for exchange-
traded derivatives and that for over-the-counter derivatives.

Foreign exchange market (Forex, FX, or currency market) is a global

decentralized or over-the-counter (OTC) market for the trading of currencies.
This market determines foreign exchange rates for every currency. It includes all
aspects of buying, selling and exchanging currencies at current or determined
prices.
Financial Intermediaries
Definition: Financial intermediary is the organization which acts as a
link between the investor and the borrower, to meet the financial
objectives of both the parties. These can be seen as business entities
which accept deposits from the depositors or investors (lenders) by
allowing them low interest on their sum. Further, these
organizations, lend this amount to the individuals and firms
(borrowers) at a comparatively high rate of interest to make their
margin.