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Finance is the art of passing currency from hand to hand until it finally disappears.
Robert W. Sarnoff
TEXT A
The field of finance is broad and dynamic. It directly affects the lives of every person and every organization, financial and non-financial, private or public, large or small, profit -seeking or non-profit. Finance can be defined as the art and science of managing money. All individuals and organizations earn or raise money and spend or invest money. Finance is concerned with the process, institutions, markets, the instruments involved in the transfer of money among and between individuals, businesses and governments.
Finance provides the framework for making decisions as to how to get funds and what we should do with them once we have them. It is the financial system that provides the platform by which funds are transferred from those entities that have funds to those entities that need funds.
Finance has its origin in the fields of economics and accounting. Economists use a supply-and-demand framework to explain how the prices and quantities of goods and services are set in a free-enterprise or market-driven economic system. Accountants provide the record-keeping mechanism for showing ownership of the financial instruments used to facilitate the flow of financial funds between savers and borrowers. Accountants also record revenues, expenses, and profitability of organizations involved in the production and exchange of goods and services. The foundations for finance draw from the field of economics and, for this reason, finance is often referred to as financial economics. The tools used in financial decision-making, however, draw from many areas outside of economics: financial accounting, mathematics, probability theory, statistical theory, and psychology, as we show in Exhibit 1.
Large-scale production and a high degree of specialization of labour can function only if there exists an effective means of paying for productive resources and final products. Business can obtain the money it needs to buy capital goods such as machinery and equipment only if the institutions and markets have been established for making savings available for such investment. Similarly, the governmental units can carry out their wide range of activities only if efficient means exist for raising money, for making payments, and for borrowing.
We can think of the field of finance as comprised of three areas: capital markets and capital market theory, financial management, and investment management, which are all interconnected, based on a common set of theories and principles. Finance consists of three interrelated areas: (1) money and capital markets, which deals with securities markets and financial institutions; (2) investments, which focuses on the decisions made by both individual and institutional investors when they choose securities for their investment portfolios; and (3) financial management, or "business finance," which involves decisions within firms. The career opportunities within each field are many and varied, but financial managers must have a knowledge of all three areas if they are to do their jobs well.
EXHIBIT 1. Finance and Its Relation to Other Fields
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