A Brief Note On Fundamentals Of Finance and Aspects related!
Finance is a topic that is used widely in our professional and our day to day lives. From balancing a cheque book to developing a household budget and planning for retirement, financial literacy helps us in understanding the way we look at money and how we handle it. The world that we live in today has grown complex with time and it has become essential to possess the financial knowledge since financial literacy can be the difference between an unstable future and a comfortable one.
What is finance?
Finance is associated with topics related to management, creation, study of money and it’s investment. Basically, finance is related to acquiring the needed money and it’s further management.
Since the requirement of money is essential equally for individuals, businesses, corporations and government entities to operate, the funding in finance has been divided into three types-
Fundamentals of Finance—
Finance is a broad term that is connected to banking, capital markets, credit, leverage or debt, money and investments. Fundamentals of finance thus includes the basic qualitative and quantitative information that contributes to the financial stability of an individual or a company and their subsequent financial valuation.
Since the financial sector has changed globally the comprehensive understanding of this sector has become important. There is a need of awareness for everyone towards finance to access it safely and profitably. Thus, financial education is important not just for investors but also for average family trying to balance their monthly budget and save for their stable future.
Acquiring the knowledge related to finance involves aspects that deals with returns and risks of financial bodies. This knowledge helps in limiting the risk and maintaining the stability while acquiring the needed finance. The basics of finance explain about bank accounts, debit cards, credit cards, PAN cards, loans, investments, insurance and taxes.
Analysts and investors study the fundamentals to develop an insight of whether the underlying asset is worth investing, and if there’s a fair valuation of the asset in the market. In business, information such as profitability, assets, liabilities, revenue and growth potential are considered as fundamentals. Through the use of fundamentals of finance one can assess a company’s financial ratio and determine the feasibility of the investment.
While fundamentals are mostly considered as factors that relate to a particular business, national economies, interest rates, gross domestic product’s growth, trade balance deficits/surplus and the change in value of their currencies which can also be analysed by having a good understanding of the basic fundamentals.
One of the most important theories of finance is the value of money in a period of time. This theory primarily states that the value of money depends merely on the growth of the economy. For example, the worth of a dollar may increase in future or on the other hand it may become totally worthless in future. Thus, the value of money may change with a period of time.
Types of Finance—
Finance has been divided into two types-
- Equity financing
- Debt financing
Equity financing- The capital raised by the business through sale of shares is considered as equity financing. In finance, ownership of assets is said to be equity. Companies raise money to meet their short-term needs like to pay bills or for their long-term requirement of investing fund for their business’s future. By selling the shares, the companies also give a part of their ownership in return for public’s equity investment.
Equity can also be sold to an investor, called a third-party investor, who has no existing stake in the business. Or it can also be raised solely from the existing shareholders, through rights issue. There are other sources in equity, for example, friends, investors, or an Initial Public Offering (IPO). There are many well-known industries who’ve raised capital from IPOs.
The finance-acquiring process from equity is governed by rules imposed by local or national authorities for jurisdiction. These regulations are primarily designed to protect public from unscrupulous operators and activities in the market. For this reason equity financing is accompanied by an offering memorandum or prospectus, which contains the required information that should help the investor make an informed decision regarding the investment. The investment in equity depends significantly on the state of the financial market in general and in equity markets specifically.
Debt financing- Debt financing refers to a way where a firm raises money for capital expenditures by selling debt instruments to investors. Capital expenditures means the requirement of a firm to acquire fixed assets such as to purchase building, land or equipments. In return for this lending , the investors become creditors of the firm. A certain rate of interest is also promised to be repaid with the principal amount.
Debt financing occurs when a firm has to sell it’s fixed income products, such as bills or bonds to the investors for acquiring the capital needed to expand the operations of their firm.
The amount firm has borrowed from the investors must be paid back on an agreed date in the future, with an agreed interest rate along with the principal amount. If in case the company goes bankrupt without paying the loan, the lenders can have a higher claim on any of the liquidated assets of the Company.
This leaves a Company to mandotarily secure enough amount of profits and dispositions every month, quarter or may be year to satisfy the shareholders and creditors of the company. Also, the investment decisions taken by the company relating to their new projects and operations should generate greater returns than the cost of their capital in order to satisfy their debt on financing. If returns of the capital expenditure are below it’s capital, then the firm is not generating positive earnings for its investors. And in this case the company may need to re-evaluate it’s capital structure.
Therefore, the understanding of financing plays a major role to practise the concepts of investments and returns. Even though you may have completed your education, you would always be updates with the most current financial changes. And realising your focus and adjusting your finances now will make a remarkable difference in your future.