- History of Finance
- Types of Finance
- Sources of Finance
Finance involves the management of monetary resources. It encompasses the strategic allocation, utilisation, and optimisation of funds to achieve specific objectives. This field revolves around activities such as budgeting, investing, lending, and risk assessment to ensure prudent financial decision-making.
It has various disciplines from personal financial planning to corporate investments and public sector fiscal management, aiming to maximise financial efficiency and achieve predefined goals.
History of Finance
The evolution of finance over millennia has seen it move from prehistoric trade and barter systems to highly developed contemporary financial markets. Before early civilisations such as the Greeks, Romans, and Mesopotamians established coins and paper money they exchanged goods for one another through barter.
Later, the growth of stock markets, particularly the Amsterdam Stock Exchange, in the 17th and 18th centuries facilitated the establishment of joint-stock companies and the development of commerce. Notable advancements in the finance sector were brought about by the Industrial Revolution's introduction of new financial institutions and instruments. A number of financial breakthroughs, such as the creation of central banks, the Great Depression, and intricate financial markets, occurred in the 20th century.
Through this journey, globalised finance was born, characterised by electronic trading and derivatives.
Types of Finance
We can categorise finance into three main categories.
Personal finance: The study of personal finance focuses on handling one's own money, including budgeting, investing, saving, and retirement planning. Budgeting, putting money down for a down payment on a home, and investing in stocks or mutual funds are examples of personal finance.
Corporate finance: A company's financial decisions, including capital investments, funding sources, and shareholder value maximisation, are governed by corporate finance. Examples include choosing an organisation's optimal capital structure, choosing investments, and controlling cash flow.
Public finance: Public finance is concerned with the financial operations of governments and other public bodies. It includes things like taxation, project budgeting, and the distribution of funds for public services like healthcare and education. Public finance includes, for instance, a government budget that allots money for social welfare or infrastructure development.
Sources of Finance
Individuals, businesses, and governments have access to two types of finance:
Personal Savings: For individuals, this is often the first source of finance, involving using one's own savings or accumulated funds.
Retained Earnings: Businesses reinvest profits back into the company for expansion, growth, or operational needs.
Sale of Assets: Selling unused or underutilised assets, such as property, equipment, or investments, to generate funds.
Depreciation Funds: For businesses, utilising funds set aside from the depreciation of assets can serve as an internal source of finance.
Debt Financing: Taking loans or credit from various sources, such as banks, financial institutions, or through bonds.
Equity Financing: Raising funds by selling shares of ownership in the company to investors.
Venture Capital and Angel Investors: Investors provide capital to startups or businesses in exchange for equity or a stake in the company.
Crowdfunding: A collective effort of individuals who pool money to support efforts initiated by others, often done online through platforms like Kickstarter or GoFundMe.
Grants and Subsidies: Government or private organisations sometimes offer non-repayable funds to support specific activities, research, or projects.