FM-AA-CIA-15 Rev.

0 10-July-2020

Study Guide in FM 107: Capital Market Module No. ____

STUDY GUIDE FOR MODULE NO. _1_

Part I: Background
Module 1: What is Finance?
MODULE OVERVIEW

Finance is the application of economic principles to decision-making that involves

the allocation of money under conditions of uncertainty. Investors allocate their funds
among financial assets in order to accomplish their objectives, and businesses and
governments raise funds by issuing claims against themselves that are invested. Finance
provides the framework for making decisions as to how those funds should be obtained and
then invested. It is the financial system that provides the platform by which funds are
transferred from those entities that have funds to invest to those entities that need funds to
invest.

MODULE LEARNING OBJECTIVES

At the end of this module, you should be able to:

 Explain the role of Finance and its types;
 Differentiate the three specialty areas of Finance.

LEARNING CONTENTS

Finance
 It is a broad term that describes activities associated with banking, leverage or debt,
credit, capital markets, money, and investments.
 It represents money management and the process of acquiring needed funds.
Finance also encompasses the oversight, creation, and study of money, banking,
credit, investments, assets, and liabilities that make up financial systems.
 It is defined as the management of money and includes activities such as investing,
borrowing, lending, budgeting, saving and forecasting.

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 a financial model for a corporation
 Saving personal money in a high-interest savings account
 Developing a forecast for government spending and revenue collection

Types of Finance:

Because individuals, businesses, and government entities all need funding to operate, the

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 FM-AA-CIA-15 Rev. 0 10-July-2020

Study Guide in FM 107: Capital Market Module No. ____

finance field includes three main subcategories:

 Personal finance – is specific to an individual’s situation and activity. Therefor,

financial strategies depend largely on the person’s earnings, living requirements,
goals and desires.
 Corporate finance – refers to the financial activities related to running a corporation
usually with a division or department setup to oversee those financial activities.
 Public (government) finance – includes taxing, spending, budgeting, and debt
issuance policies that affect how a government pays for the services it provides to
the public. It is a part of fiscal policy.

The theoretical foundations for finance draw from the field of economics and, for this
reason, finance is often referred to as financial economics. The tools used in financial
decision-making, however, draw from many areas outside of economics: financial
accounting, mathematics, probability theory, statistical theory, and psychology.

It is generally agreed that the field of finance has three specialty areas:
 Capital markets and capital market theory
 Financial management
 Investment management

A. Capital Markets and Capital Market Theory

The specialty field of capital markets and capital market theory focuses on the study of the
financial system, the structure of interest rates, and the pricing of risky assets.

The financial system of an economy consists of three components:

1. financial markets;
2. financial intermediaries;
3. financial regulators.

B. Financial management

Financial management, sometimes called business finance, is the specialty area of finance
concerned with financial decision-making within a business entity. Often, we refer to
financial management as corporate finance. However, the principles of financial
management also apply to other forms of business and to government entities. Moreover,
not all non-government business enterprises are corporations. Financial managers are
primarily concerned with investment decisions and financing decisions within business
organizations, whether that organization is a sole proprietorship, a partnership, a limited
liability company, a corporation, or a governmental entity.

Goal of the firm: to maximize shareholder’s wealth

C. Investment management

Investment management is the specialty area within finance dealing with the management
of individual or institutional funds. Other terms commonly used to describe this area of
finance are asset management, portfolio management, money management, and wealth
management. In industry jargon, an asset manager “runs money.”

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 FM-AA-CIA-15 Rev. 0 10-July-2020

Study Guide in FM 107: Capital Market Module No. ____

Investment management involves five activities:

1. Setting investment objectives;
2. Establishing an investment policy;
3. Selecting an investment strategy;
4. Selecting the specific assets;
5. Measuring and evaluating investment performance.

To learn more about this lesson, please refer to reference cited on the last page of this
module.
LEARNING ACTIVITY 1

Reflection on Learning:
 How is finance important in our lives?
 How are funds provided and sourced-out from the different types of Finance?
 How are the primary areas of finance connected by the risk and return?

Learning Activity:
 Prepare for a recitation or oral/written participation.
 Prepare for a quiz after discussion.

SUMMARY

 Finance encompasses banking, leverage or debt, credit, capital markets, money,

investments, and the creation and oversight of financial systems.
 The finance field includes three main subcategories: personal finance, corporate
finance, and public (government) finance.
 The three primary areas of finance, namely capital markets, financial management,
and investment management, are connected by the fundamental threads of finance:
risk and return.

REFERENCES

 Fabozzi, Frank J. and Pamela Peterson Drake (2009). Capital Markets, Financial
Management and Investment Management. John Wiley & Sons, Inc.
https://www.academia.edu/34595245/Book_Finance_Capital_Markets_Financial_Ma
nagement_and_Investment_Management_2009_Fabozzi?
fbclid=IwAR0FcM9GgBwRz-hmQQfttNRDCB4wYddKbNMG5hQUHb-
oJJ7Elf2MalIkWI4
 Lopez-Mariano, Norma D (2017). Capital Markets. Rex Bookstore Inc.
 Kurt, Daniel (2022). What is Finance? Investopedia.
https://www.investopedia.com/ask/answers/what-is-finance/
 Corporate Finance Institute (2022). Finance Definition.
https://corporatefinanceinstitute.com/resources/knowledge/finance/what-is-finance-
definition/

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