What is Finance?

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Last updated: August 12, 2019

1. What is finance? Finance is the study of how individuals, institutions, governments, and businesses acquire, spend, and manage money and other financial assets. Some say that is the art and science of managing money. 2. What are the disciplines related to finance? Finance is both related to economics and accounting. Economists use a supply-and-demand framework to explain how the prices and quantities of goods and services are determined in a free-market economic system.

Accountants supply the record-keeping mechanism for showing ownership of the investments used in the flow of funds among savers and borrowers. Accountants also record revenues, expenses, and profitability of organizations that produce and exchange goods and services. It is very vital that financial manager is knowledgeable in Accounting and Economics. The objective of the financial manager in a profit- seeking organization is to maximize the owners’ wealth. This is accomplished through effective financial planning and analysis, asset management, and the acquisition of financial capital.Financial managers in not-for-profit organizations aim to provide a desired level of services at acceptable costs and perform the same financial anagement functions as their for-profit- counterparts. 3.

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Why we study finance? a. To make informed economic decisions. b. To make informed personal and business investment decisions. c. To make informed career decisions based on a basic understanding of business finance.

4. What are the careers in finance? a. Financial management Larger business typically divide their finance activities into treasury and control functions, whereas smaller firms combine these functions.The treasurer is responsible for managing the firm’s cash, acquiring and managing the firm’s assets, nd selling stocks and bonds to raise financial capital necessary to conduct business. Other functions of a treasurer are as follows: Determination of employee’s benefits Insurance matters Credit and collections Corporate investments Investor relations Banking and foreign exchange problems Determination of financial requirement and procurement of funds The controller is responsible for cost accounting, financial accounting and tax record-keeping activities.Other functions of a controller are as follows: Economic appraisal Government reporting and tax administration Evaluation of company objectives and policies Interpretation of results of operations Budgeting From the following information, we can conclude now that the treasurer takes care of the external finance functions while the controller takes care of the internal ones.Entry level career opportunities include in financial management are as follows : Financial analyst: involves evaluating financial performance and preparing financial plans Cost analyst : involves comparing actual against budgeted operations Credit analyst : involves evaluating credit applications and collecting amounts owed by ustomers Tax analyst: involves preparing financial statements for tax purposes Cash management analyst : involves managing the firm’s day-to-day cash flows b.

Depository financial institutions Banks offer the opportunity to start a finance career in consumer lending.Banks also manage funds for individuals and organizations. Loan analyst : involves evaluating consumer loan applications Bank teller : involves assisting customers with their day-to-day banking transactions Investments research analyst : involves conducting research on investment opportunities for a bank trust department . Contractual savings and real property organizations Insurance companies, pension funds, and real estate firms also provide opportunities for starting a career in finance.These institutions need a variety of employees willing to blend marketing or selling efforts with financial expertise. Entry level career opportunities include: Insurance agents (broker) : involves selling insurance to individuals and participating in the processing of claims Research analyst: involves analyzing the investment potential of real property for pension fund holdings Real estate agent(broker) : nvolves marketing and selling residential or commercial property Mortgage analyst : involves analyzing real estate loan applications and assisting in the arrangement of mortgage financing d.Securities markets and investment firms Securities firms and various investment-related businesses provide opportunities to start a finance career in the investments area. Opportunities include buying and selling stocks, analyzing stocks for investment potential, and even helping individuals manage their personal resources.

Stockbroker (account executive) : involves assisting clients in purchasing stocks and onds and building investment wealth Security analyst : involves analyzing and making recommendations on the investment potential of specific stocks Investment banking analyst : involves conducting financial analysis and valuation of new securities being issued Financial planner assistant : involves analyzing individual client insurance needs and investment plans to meet retirement goals Careers in finance are also available in government or not-for-profit organizations.Hospitals and other not-for-profit organizations also need expert financial managers to manage assets, control assets, and obtain funds. Financial and other analysts are hired both by government units and not-for-profit organizations to perform these tasks. All of these entry level finance Job opportunities can be found in the international setting as well. 5. What are the pillars of finance? a. Money has a time value.

b. If there is a higher risk involved, there is a probability ofa higher return. c. Financial markets are efficient in pricing securities. d. Reputation matters.Ethical behavior is how an individual or organization treats others legally, fairly, and honestly.

6. What is the significance of finance in business? 7. What are the roles of financial manager? Financial Managers stand between the firm’s operations and outside investors. 8. Where should you start a personal finance? The first step to getting your personal finances under control is to clearly understand where you are now. List your assets and liabilities.

It may seem small right now, but it would soon grow upon graduation from college. In short, try to make your own personal Balance Sheet.You should then know your own “Personal Equity’.

Find a method of tracking your persona; finances, either with a simple notebook or with computer software packages like Microsoft excel. The important thing to do is to be consistent and make sure all of your spending and budgeting is tracked for a complete picture. Once you have a precise picture of your Personal Equity, you need to identify your short and long term goals like : a. When do you want to have your first Pl million? In what way will you achieve this goal ? b. When do you want to get married? c.

Do you still want to pursue further studies? . Are there specific purchases you are planning? Like your own house or your car? e. do you want to retire? Once you understand what’s important to you, you will understand what needs to be one to get there, how much you’ll need to earn, how much you’ll need to save, and over what period of time. Basically, “know where you are, and where you want to be.

” 9. Is personal finance needs or Just wants? Most of us live beyond our means because we fail to know the difference between our needs and wants. There are times when we feel the urge to buy something we think we need.It is often pressure from friends or family or the dictates of society that bring forth this urge.

And the sad truth is, it is usually too late when we realize that we only WANT??”not really NEED what we had spent for. Needs are man’s basic requirements to be able to live. The basic needs are food, clothing and a house to live in. We need food to give energy to our body so we can work or study. We need clothes to wear at home, in school or in the office. We need a place to sleep in. Other basic needs include transportation, education, health protection, and life insurance, and some form of leisure to balance our life.

Living without these needs make life more difficult and not worth living. 10. What are the financial life stages? a. Start up Stage- your only source of income is your salary or earnings provided by our active participation in terms of time and talent . b. Build-up Stage- you have income coming from savings and investments which contribute at least 20% of your total income.

c. Asset Allocation Stage – a good portion (30%-60%) of your income is being provided by your savings and investments. d. Retirement Stage – income from your savings and investments is your only source to support your living expenses. 1 . What do you mean by financial independence? The concept of wealth is usually equated to having lots of money.

But in reality, having money, or even lots of money, Is no assurance that one is automatically ealthy and can therefore afford to stop working for money. Wealth is really a condition where you present financial can support your lifestyle over a long period of time even if you do not work to generate income. Do even if you are not a millionaire, you can consider yourself as a wealthy person if you are satisfied in living a simple way of life. 2. What are the sources of income? a. Active income – income that come directly as a result of your own hard work, your skill, talent, and time. Once you stop working, you stop earning active income.

Primary income – main source of income (salaries, allowances, commissions, and ncome from small buy and sell business) b. Passive income- income generated by your earning asset and investments. This income does not depend on your active participation in terms of time, skill, or talent.

This is your income even if you do not work.It comes for your savings and investments. This amount represents your true wealth.

13. What are the obstacles to financial freedom? According to Francisco Colayco, there are many barriers to financial independence that we must overcome: Poor spending habits Impulsive buying Spending because of trends Lack of financial literacy Procrastination Inflation Unreasonable demands of family and friends Fear of failure Laziness 14. What are the ways to invest your savings? a. Debt reduction – When you borrow, you should be able to pay for the amortization on time.If you are slapped penalties for habitual late payment, then you cannot afford the loan. Pay the smallest loan first. Being able to eliminate one debt will further strengthen your resolve to pay all of your other loans. b.

Bonds – Bonds are issued by governments and large corporations to raise funds for their specific projects. Bonds offer a fixed amount of interest for a fixed period of time. It is usually for a long period of time. At maturity date, the exact amount of the bond will be repaid to you and the interest payments stops.Interest rates on bonds are usually higher than the rates paid by banks.

c. Bank deposits – Your bank deposits is actually a loan that you give to the bank, especially if it a savings or time deposit. But the interest rates for savings deposits are much lower than the inflation rate. Up to 500,000 of you money in the bank is covered by PDIC. Each bank charges a penalty fee when you do not keep your account active, or within the minimum required balance. You must deposit or withdraw money regularly to keep it active, but you must also keep your money within the minimum required balance.Some would say that is a safe but not a smart investment decision. If the inflation rate is higher than the interest rate given by the bank, then the buying power of your money goes down.

d. Pension plans – This is a good option that makes sure you have some cash upon retirement. The the plan.

Government-provided ones through the Social Security System (SSS) and Government Service Insurance System (6SlS) Company-provided pension plans Financial institution plans e. Start a business – You should have a real personal interest and passion in the business you will engage in. f you enjoy and love what you are doing, you will have the drive to learn every aspect of your business and manage it well. A business succeeds or fails based on the owner’s commitment and ability to execute and manage his business plans well.

f. Real estate – You can be involved in real estate as a business or as an investment. As a real estate developer, you will be involved in buying a property, developing it and selling or leasing it. This can be a good business depending on your capability to : Conceptualize a feasible project. Choose the right location for your chosen market.Acquire the property at a good price. Secure proper financing.

Complete the construction on time and on budget. Sell the project within time and price budgets. Administer the sale or lease of the property. g.

The stock market – Most Filipinos know little about the company stocks listed on the Philippine Stock Exchange (PSE). The stock market is the place where shares of a company are exchanged for the money of investors. The companies raise money from the public to expand their operations. But these companies do not guarantee that they will make oney for their investors.To buy and sell stocks, you have to deal with a stock broker.

h. Mutual funds – A mutual fund is a company that sells its shares to on the Net Asset Value Per Share (NAVPS). Money pooled from selling these shares are used by experienced fund managers to invest in carefully selected securities, stocks or other assets, following the objectives of the fund. These investments earn money for the mutual fund through dividends or interest and through the buying and selling of these investments. The NAVPS of the mutual fund changes daily depending on the value of the nvestments made minus the fund expenses.Investors receive their money back when they sell their shares. Mutual funds could be a combination of lending investment and ownership investment, depending on their type.

Mutual funds are usually classified into: Stock Balanced funds, which is a mix of both stock and fixed income placements. Bond fund which is purely invested in government securities. Money market funds invested in fixed-income short-term funds. A good alternative to bank deposits is investing in mutual fund. For as low as P5,OOO, one can invest in a mutual fund.

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