What is Finance? – Definition, Overview, Types of Finance

What is 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) personalPersonal FinancePersonal finance is the process of planning and managing personal financial activities such as income generation, spending, saving, investing, and protection. The process of managing one’s personal finances can be summarized in a budget or financial plan., (2) corporateCorporate Finance OverviewCorporate finance deals with the capital structure of a corporation, including its funding and the actions that management takes to increase the value of, and (3) publicPublic FinancePublic finance is the management of a country’s revenue, expenditures, and debt load through various government and quasi-government institutions. This guide provides an overview of how public finances are managed, what the various components of public finance are/government. This guide will unpack the question: what is finance?

 

Video Explanation of Finance

Watch this short video to quickly understand the main concepts covered in this guide. It’ll explain the definition of finance, provide examples of finance, and cover some of the common topics on finance.

 

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 stocksStockWhat is a stock? An individual who owns stock in a company is called a shareholder and is eligible to claim part of the company’s residual assets and earnings (should the company ever be dissolved). The terms “stock”, “shares”, and “equity” are used interchangeably., bonds, or guaranteed investment certificates (GICs)
• Borrowing money from institutional investors by issuing bonds on behalf of a public companyPrivate vs Public CompanyThe main difference between a private vs public company is that the shares of a public company are traded on a stock exchange, while a private company’s shares are not.
• Lending money to people by providing them a mortgage to buy a house with
• Using ExcelExcel ResourcesLearn Excel online with 100’s of free Excel tutorials, resources, guides & cheat sheets! CFI’s resources are the best way to learn Excel on your own terms. spreadsheets to build a budget and financial modelWhat is Financial ModelingFinancial modeling is performed in Excel to forecast a company’s financial performance. Overview of what is financial modeling, how & why to build a model. for a corporation
• Saving personal money in a high-interest savings account
• Developing a forecastFinancial ForecastingFinancial forecasting is the process of estimating or predicting how a business will perform in the future. This guide on how to build a financial forecast for government spending and revenue collection

 

 

Finance Topics

There is a wide range of topics that people in the financial industry are concerned with. Below is a list of some of the most common topics you should expect to encounter in the industry.

• Interest ratesInterest Rate CalculatorThis interest Rate Calculator will help you compute the effective interest rate based on the number of periods, type of interest rate (simple vs compound), and initial balance amount. Interest Rates are one of the vital concepts in finance and are a key element in most calculations. and spreads
• Yield (coupon payments, dividends)
• Financial statements (balance sheet, income statement, cash flow statement)
• Cash flowCash FlowCash Flow (CF) is the increase or decrease in the amount of money a business, institution, or individual has. In finance, the term is used to describe the amount of cash (currency) that is generated or consumed in a given time period. There are many types of CF (free cash flow, other types of cash flow)
• Profit (net income)
• Cost of capital (WACCWACCWACC is a firm’s Weighted Average Cost of Capital and represents its blended cost of capital including equity and debt. The WACC formula  is = (E/V x Re) + ((D/V x Rd)  x  (1-T)). This guide will provide an overview of what it is, why its used, how to calculate it, and also provides a downloadable WACC calculator)
• Rates of return (IRRInternal Rate of Return (IRR)The Internal Rate of Return (IRR) is the discount rate that makes the net present value (NPV) of a project zero. In other words, it is the expected compound annual rate of return that will be earned on a project or investment., ROIReturn on Investment (ROI)Return on Investment (ROI) is a performance measure used to evaluate the returns of an investment or compare efficiency of different investments., ROAReturn on Assets & ROA FormulaROA Formula. Return on Assets (ROA) is a type of return on investment (ROI) metric that measures the profitability of a business in relation to its total assets. This ratio indicates how well a company is performing by comparing the profit (net income) it’s generating to the capital it’s invested in assets.)
• DividendsDividendA dividend is a share of profits and retained earnings that a company pays out to its shareholders. When a company generates a profit and accumulates retained earnings, those earnings can be either reinvested in the business or paid out to shareholders as a dividend. and return of capital
• Shareholders
• Creating valueEVA – Economic Value AddedEVA or Economic Value Added is a measure based on the Residual Income technique which measures the return generated over and above investors’ required rate of return (hurdle rate).  The metric serves as an indicator of the profitability of projects undertaken and its underlying premise consists of the idea that real
• Risk and return
• Behavioral financeBehavioral FinanceBehavioral finance is the study of the influence of psychology on the behavior of investors or financial practitioners. It also includes the subsequent effects on the markets. It focuses on the fact that investors are not always rational

 

Sources of Financial Information

To learn more about the industry, here are some of the most popular and helpful resources:

 

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 bankingCommercial Banking Career ProfileA Commercial Banking career path is providing clients with credit products such as term loans, revolving lines of credit, syndicated facilities, cash management services, and other fixed income products.  As a credit analyst or account manager, you deliver financial advice
• Personal banking (or private banking)
• Investment bankingInvestment Banking Career PathInvestment banking career guide – plan your IB career path. Learn about investment banking salaries, how to get hired, and what to do after a career in IB. The investment banking division (IBD) helps governments, corporations, and institutions raise capital and complete mergers and acquisitions (M&A).
• Wealth management
• Corporate financeCorporate Finance OverviewCorporate finance deals with the capital structure of a corporation, including its funding and the actions that management takes to increase the value of
• Mortgages / lending
• Accounting
• Financial planning
• TreasuryTreasury Career PathTreasury management jobs involve ensuring that cash and financial risks in a business are properly managed and optimized. The main priority is to ensure cash is managed for day-to-day business operations while having an outlook for long-term strategy.  The treasury career path can be a very interesting and rewarding
• Audit
• Equity researchEquity Research OverviewEquity research professionals are responsible for producing analysis, recommendations, and reports on investment opportunities that investment banks, institutions, or their clients may be interested in.  The Equity Research Division is a group of analysts and associates. This equity research overview guide
• Insurance

 

 

Additional Finance Resources

CFI is on a mission to help anyone become a world-class financial analyst by creating the Financial Modeling & Valuation Analyst (FMVA)™FMVA® CertificationJoin 350,600+ students who work for companies like Amazon, J.P. Morgan, and Ferrari certification program. To continue developing and preparing for a career in the field, these additional CFI materials will be helpful:

• Types of Financial ModelsTypes of Financial ModelsThe most common types of financial models include: 3 statement model, DCF model, M&A model, LBO model, budget model. Discover the top 10 types
• Interactive Career Map
• Compensation and salary guidesCompensationCompensation and salary guides for jobs in corporate finance, investment banking, equity research, FP&A, accounting, commercial banking, FMVA graduates,
• The Analyst Trifecta® GuideThe Analyst Trifecta® GuideThe ultimate guide on how to be a world-class financial analyst. Do you want to be a world-class financial analyst?  Are you looking to follow industry-leading best practices and stand out from the crowd? Our process, called The Analyst Trifecta® consists of analytics, presentation & soft skills

 

More Questions and Answers

CFI is the official global provider of financial modeling and valuation analyst FMVA DesignationFinancial Modeling CertificationFinancial Modeling Certification – earn your certificate as a Financial Modeling and Valuation Analyst (FMVA)® for careers in investment banking, FP&A,. CFI’s mission is to help anyone become a world-class financial analyst and has a wide range of resources to help you along the way. In order to become a great financial analyst, below are some additional questions and answersKnowledgeCFI self-study guides are a great way to improve technical knowledge of finance, accounting, financial modeling, valuation, trading, economics, and more. for you to explore further:

• What are the types of financial models?Types of Financial ModelsThe most common types of financial models include: 3 statement model, DCF model, M&A model, LBO model, budget model. Discover the top 10 types
• What is sensitivity analysis?What is Sensitivity Analysis?Sensitivity Analysis is a tool used in financial modeling to analyze how the different values for a set of independent variables affect a dependent variable
• What is bookkeeping?AccountingOur Accounting guides and resources are self-study guides to learn accounting and finance at your own pace. Browse hundreds of guides and resources.
• What are the most common valuation methods?Valuation MethodsWhen valuing a company as a going concern there are three main valuation methods used: DCF analysis, comparable companies, and precedent transactions. These methods of valuation are used in investment banking, equity research, private equity, corporate development, mergers & acquisitions, leveraged buyouts and finance