Investments are part of the field of finance.
Finance is the obligation that a subject assumes to respond to the obligation of another person, according to the dictionary of the Royal Spanish Academy (RAE) . The term comes from the French finance and also refers to funds , assets and public finances .
In everyday language, the concept refers to the study of the circulation of money between individuals, companies or different States . Thus, finance appears as a branch of economics that is dedicated to analyzing how funds are obtained and managed. In other words, finance is responsible for money management .
Personal and corporate finances
The notion of personal finances refers, in principle, to the money that a family needs for subsistence. The person must analyze how to obtain said money and how to protect it in unforeseen situations (such as, for example, a job layoff). Other applications of personal finance refer to the ability to save , spend and invest .
Within this branch of finance, specialists are dedicated to finding alternatives for the lives of individual individuals in a society, advising them on how to invest their money in order to achieve a positive balance where losses are reduced and, through a sustainable economy, collaborating with the environment and increasing the quality of life.
Corporate finance , for its part, focuses on the ways that companies create value through the use of financial resources. Investment, financing , profits and dividend are some of the concepts linked to this area.
Finance studies how money circulates.
Related concepts
There are a series of concepts whose meaning allows us to further understand the movement of money and the way in which finances are organized. Some of them are the ones we mention below.
- Risk and benefit : refers to the search for an increase in profits without investing more than is advisable, that is, minimizing the investment risks. If the investor is willing to face greater uncertainty, his profits may be greater;
- Time value of money : refers to the fluctuation that money experiences over time, to the change it represents between the present and the future (money, when invested, acquires a future value potentially greater than what it has today ). In history, money has been a fundamental element for the economic growth of countries, however the increase in inflation and certain state strategies that are not very beneficial for the finances of the territory, mean that it can be devalued and, therefore, instead If you charge a higher value, you lose it.
- Interest rate or interest rate : it is the value paid for the funds requested on loan , which responds to the exchange that exists between the current value of money and the value it will have in the future ( speculation ). When the interest rate rises, both consumption and investment decrease since citizens lose the ability to pay their debts, therefore, when it decreases, these elements increase by receiving a significant stimulus by being able to pay less interest. This concept is very present in those who draw up macroeconomic policies when trying to boost economic growth; However, it is extremely dangerous because in many cases it leads to severe economic problems, by not being able to assume the costs that the "citizen debt" has left uncovered for a certain amount of time.
Public finances
Finally, we can say that public finances are related to the fiscal policy of a State.
The government obtains funds through tax collection and reinvests that money in society through public spending (building hospitals and schools, maintaining cleanliness, etc.).