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Different Types of Finance

Finance is a broad term for subjects concerning the study, development, and management of monies and other financial assets. In particular, it concerns the questions of why and how an individual, institution or governmental body acquires the funds required for its functioning or enhancement, commonly known as capital within the business context. Finance has an unavoidable connection with economic activity because it is the mechanism through which money is acquired, used and expended. As such, it becomes crucial that managers of enterprises properly understand how to better manage their finance. To this end, a number of concepts must be understood and evaluated in order to provide proper guidance to those who are responsible for managing finance.

One major branch of the study of finance is that of banking. Banking is the practice of creating and managing financial instruments such as loans, deposits, securities, and other goods or services that are meant to secure the loan or deposit of a particular person, organization, or governmental body. Other types of financial instruments that are included in banking include securities (such as stock, bonds, securities convertible to cash), interest-bearing assets (such as treasury bills and certificates of deposit), bank receivables, and assets subject to collective bargaining. The process of creating and managing these instruments, together with the policies and procedures governing their issuance, banking influences the supply, use, prices, and value of the financial instruments themselves and the sector itself, just like all the other facets of finance.

Another major area of Finance is insurance. Insurance covers a wide range of different areas that are related to risks to property, risk to people and risk to the economy in general. Because insurance is related to the operations that support commerce, it also includes the practices of managing risk, including prudence, insurance standards, and the allocation of risk. Also, because insurance is not connected to the supply of finance itself, there are some differences between the various elements of finance. For instance, while the supply of money is tied to the level of aggregate demand, the supply of goods and services is not. While insurance is tied to the supply of risks that can be associated with the products that are insured, the factors that create risks in other areas of finance are not considered in insurance.

Another large area of finance is banking. In United States, banks make up the third largest financial group in the country, contributing approximately 9% of GDP. Banks make commercial loans, engage in purchases and sales of securities, issue notes and create open accounts. Some banks lend money to businesses, especially in the form of checking accounts or small business loans. They participate in various financial activities, such as creating and guaranteeing mortgages, purchasing corporate securities, creating and guaranteeing various forms of repurchase, and providing a variety of financial services.

One branch of the subject that is not discussed as much in the classroom is the experimental finance. Students are typically introduced to various models of financial risk management through the lenses of macroeconomics, but there are a number of models of micro-finance that are also taught. One of these is through money flow problems. Most people have heard of the so-called money cycle, where money is produced when it is spent, and money is spent again when it is produced. These are just some of the more popular models of micro-finance, which are very important in this day and age of global finance and lending.

Financial services can also be broken down into investment banking, merchant banking, bond financing, insurance, commodity markets, government finance, bank teller jobs, investment banking and the commercial real estate market. Investment banking refers to those with direct financial interests in a number of different projects, including asset management, emerging markets, venture capital and other such finance categories. Merchant banking provides funding to businesses and individuals for their specific needs, such as credit cards and loans. Bond financing deals directly with issuing financial instruments, such as bonds, notes and mortgages. Insurance is important in all of these fields, providing a variety of jobs to those who are interested in both the theoretical and practical aspects of financial services.


Peter Conley

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