Finance, the process of raising money or capital for any kind of expenditure. Consumers, business firms, and governments often do not have funds available to spend, pay off their debts, or complete other transactions and must borrow equity or borrow equity to obtain the money they need to conduct their operations. Must sell.
Savers and investors, on the other hand, accumulate money that can earn interest or dividends for productive use. These savings may accrue in the form of savings deposits, savings and loan shares, or pension and insurance claims; When lent at interest or invested in equity shares, they provide a source of investment funds.
Finance is the process of channeling these funds in the form of credit, loans, or invested capital to the economic entities that need them most or can put them to the most productive use. Those institutions which remit money from savers to users are called financial intermediaries.
These include commercial banks, savings banks, savings and loan associations, and such non-bank institutions as credit unions, insurance companies, pension funds, investment companies and finance companies.
Three broad areas of finance have developed specific institutions, procedures, standards and goals: business finance, personal finance, and public finance. In developed countries, a wide array of financial markets and institutions exist to jointly and separately meet the needs of these sectors.
Business finance is a form of applied economics that uses the tools of accounting, statistics, and quantitative data provided by economic theory in an attempt to optimize the goals of a corporation or other business entity.
The basic financial decisions involved include estimating future asset requirements and the optimal combination of funds needed to acquire those assets. Business financing uses short-term loans in the form of business loans, bank loans and commercial paper.
Long-term funds are derived from the sale of securities (stocks and bonds) to various financial institutions and individuals through the operation of national and international capital markets. See business finance.
Personal finance is primarily concerned with family budgeting, the investment of personal savings, and the use of consumer credit. Individuals typically obtain mortgages from commercial banks and savings and loan associations to purchase their homes, while financing for the purchase of consumer durables (automobiles, appliances) can be obtained from banks and finance companies.
Charge accounts and credit cards are other important means by which banks and businesses provide short-term loans to consumers. Small cash loans can be obtained from banks, credit unions or finance companies if individuals need to consolidate their loans or borrow cash in an emergency.
Since the Great Depression of the 1930s, the level and importance of public or government finance has increased rapidly in Western countries. As a result, the nature of taxation, public expenditure and public debt now generally has a much greater impact on a country's economy than before.
Governments finance their spending in many different ways, the most important of which is by far the most important. However, government budgets are rarely balanced, and governments have to borrow to meet their deficits, which in turn creates public debt.
Most public debt consists of marketable securities issued by the government, which must make specified payments at specified times to the holders of its securities.
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