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What Is Finance? - Definition, History, Types, and How To Navigate The Financial World

 

By Nerly Shammah Apr 22, 2023

 

Finance refers to the study of money and its utility in business and economic environments. Finance also refers to the act of funding a given project in a specific business field for the sole purpose of enabling building and innovation.

 

 

Finance, similar to money, is a term that can get a bit tricky to understand given that it encompasses a lot of substructures that make it a grand force in business and economy. First, it acts as a noun, reflecting the creation, management, study and investment of money. Secondly, as a verb, it reflects the act of placing cash or money in a system as what is referred to as "funding" in order to enable that system to carry out day-to-day operations that may or may not involve building a for-profit network.

 

 

What Is Finance? 

 

Finance simply refers to all activities including the creation, borrowing, lending and investment of money. Divided into three major parts, it can be said that finance is a study that reflects the relationship and relative effects of the creation and utilization of money within personal, corporate and public business environments.

 

Understanding The Concept Of Finance 

 

Finance is in essence the study of money and its utilization. Similar to the concept or study of economics, which is the study of production, distribution and consumption of goods and services within a given system, Finance is a study of the one thing that serves as a means of exchange of goods and services in a given system - money. This means that despite being an after-creation given that the history of trade dates back to an era of "trade by barter" where money did not exist, Finance has however come to claim a position in the economic and trade system as a pillar holding up all major aspects of business operations globally.

 

History Of Finance

 

The history of finance is as far back as time. The history of finance is closely tied to the break of civilization in the Western world when the old trade-by-barter system of financial transactions was displaced as society grew more complex and advanced. 

 

The introduction of promissory notes and bills of exchange marked the start of new trade systems across the world. Promissory notes were written promises with a specified amount of money to be paid to an individual in a given time, these were leveraged as a form of value transfer and were accepted as a means of finance as though they held value in the form of "debts" which of course, even in today's world with the popularity of "fiat currencies", money is still widely considered a debt owed inevitably to the central bank. 

 

Bills of exchange on the other hand were simply orders of payment of a specific amount of money. European merchants are known in the history of finance in the middle ages for using bills of exchange to facilitate international trade. This grew on the rest of the world leading to the Dutch East India Company becoming the first publicly traded company in the world and this marked the beginning of the modern financial system.

 

As we know it, the 17th and 18th centuries saw the development of financial markets, and institutions like stock exchanges, banks, and insurance companies were birthed into the establishment, the first stock exchange was established in Amsterdam in 1720, and the second followed with the creation of the London Stock Exchange in 1801.

 

Finance grew its arms and began to spread across, capitalism and industrialization experienced growth in the 19th century seeing the establishment of large corporations and more sophisticated financial instruments being deployed. companies and the government could access public finance via the development of these securities, bonds and stocks widely leveraged to generate capital from investors. 

 

Types Of Finance

 

There are primarily three types of finance namely: personal finance, corporate finance and public finance.

 

Personal finance: This type of finance encompasses the management of individual and household finances. This is primarily via budgeting, savings, personal investments, retirement planning, and management of debt.

 

Corporate finance: This type of finance spans the management of corporate finances such as companies and business accounts, It includes corporate financial planning, capital budgeting, fundraising, risk management etc.

 

Public finance: This generally involves the management of finances pertaining to the distribution of income, economic stabilization, the allocation of resources and all public and government funding usually obtained via taxation. 

 

It is important to note that finance is not limited to the aforementioned, there are several other aspects of finance including social finance, behavioural finance, investment finance, international finance, Islamic finance, venture capital, Real Estate finance, healthcare finance, environmental finance, quantitative finance and many more. Finance spans broadly into human everyday operations from personal, to commercial or business, then to the public, bridging all monetary activities within a given economic system. 

 

What Does The Term "Financing" Mean?

 

The term "financing" means to fund. Funding here refers to investing money into a system to foster operations either for a profit or non-profit.

 

How To Navigate The Financial World

 

Learning about finance and applying that knowledge to our personal lifestyle is a bold step not many opt to take. However, it shouldn't be as scary as it is made to look. 

 

Finance, which is the study of money, generally, is something we are already accustomed to as humans given that we spend and earn every day or occasionally as individuals. To navigate the financial world, you must learn what money is and what forms there are. With this knowledge, you can further leverage either of these forms by learning about the diverse sectors therein and how to extract the value that flows within them.