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The activity of finance is the application of a set of techniques
that individuals and organizations (entities) use to manage their
financial affairs, particularly the differences between income and
expenditure and the risks of their investments.
An entity whose income exceeds its expenditure can lend or invest
the excess income. On the other hand, an entity whose income is less
than its expenditure can raise capital by borrowing or selling equity
claims, decreasing its expenses, or increasing its income. The lender
can find a borrower, a financial intermediary, such as a bank or buy notes or bonds in the bond market.
The lender receives interest, the borrower pays a higher interest than
the lender receives, and the financial intermediary pockets the
difference.
A bank aggregates the activities of many borrowers and lenders. A
bank accepts deposits from lenders, on which it pays the interest. The
bank then lends these deposits to borrowers. Banks allow borrowers and
lenders, of different sizes, to coordinate their activity. Banks are
thus compensators of money flows in space.
A specific example of corporate finance is the sale of stock by a
company to institutional investors like investment banks, who in turn
generally sell it to the public. The stock gives whoever owns it part
ownership in that company. If you buy one share of XYZ Inc, and they
have 100 shares outstanding (held by investors), you are 1/100 owner of
that company. Of course, in return for the stock, the company receives
cash, which it uses to expand its business in a process called "equity
financing". Equity financing mixed with the sale of bonds (or any other
debt financing) is called the company's capital structure.
Finance is used by individuals (personal finance), by governments
(public finance), by businesses (corporate finance), etc., as well as
by a wide variety of organizations including schools and non-profit
organizations. In general, the goals of each of the above activities
are achieved through the use of appropriate financial instruments, with
consideration to their institutional setting.
Finance is one of the most important aspects of business management.
Without proper financial planning a new enterprise is unlikely to be
successful. Managing money (a liquid asset) is essential to ensure a
secure future, both for the individual and an organization.
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