Branches of Finance: Introduction

Branches of Finance:

The funding covers an area of activity (financing) of providing money to achieve economic operation. Finance has now taken on enormous importance in the functioning of the economy and financial crises have serious consequences for global growth and unemployment. In the second half of the XX th century, we have seen develop an increasing financialisation of the economy with its internationalization and reduced public controls. In 2008 in the United States, financial players caused very large losses to large banks with the subprime mortgage crisis .

Summary

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  • 1The different aspects of finance
  • 2Financing
  • 3Financial Markets
  • 4Financial System
  • 5Financial actors
  • 6Financial globalization
  • 7Eurodollars and offshore finance
  • 8Financial analysis
  • 9The risk
  • 10Financial crises

The different aspects of finance edit Edit wikicode ]

Finance refers to individuals, households, public or private enterprises, and states. It will therefore intervene in many areas:

The Corporate Finance focuses on the financial management of companies operating matters (short-term Treasury) or investment (medium and long term).
The public finance covers the financing of operations and the state budget, public authorities and social organizations.
The private finance the management of heritage and personal income, as well as retirement.
The financial mathematics are a set of computational tools for modeling and decision support, including calculations on interest rates and financial instruments.
The investment choices are the criteria and methods to select investments according to their expected profitability or their value creation.
The financial evaluation is estimating the value of financial assets (stocks, bonds, options, see financial asset) or corporate assets (business valuation) or real estate.
The financial policy is the choice of corporate financing, in order to optimize their Weighted Average Cost of Capital (WACC). The breakdown between equity and debt financing, dividend policy are central issues in financial policy based on Financial Analysis .
The modern theory of the portfolio is the optimization of the distribution of assets by diversification. Initially developed for the financial markets, this discipline also serves the field of corporate finance. More generally, we talk about risk management .
The Behavioral Finance is the identification of individual and collective psychological factors involved in financial decisions and their impact on price formation and financial returns.
The monetary policy is conducted by the central banks in interaction with international public finance (ie international official organizations: IMF, World Bank, BIS, EIB, EBRD, etc …)

Funding edit Edit wikicode ]

The search for financing obeys two types of objectives according to the initial volume of capital:

At the level of restricted capital, is sought to obtain the necessary and sufficient capital to undertake, maintain or develop an activity;
At proven level of capital, the objective is to find the most relevant investments in performance and security according to the time value of the money.

To finance, an economic agent (a private or public organization, or an individual) can:

By self-financing, ie using its past profits or available financial reserves;
By direct financing through the use of the financial market (issuance of shares or bonds);
By indirect or intermediated financing using bank credit.

Financial Markets edit Edit wikicode ]

Market finance refers to the mechanisms by which markets can be used to finance, invest, hedge, or use complex financial instruments, such as options. Since the 1980s, financial markets have become one of the main channels of financing the economy, in addition to banks.

Financial System edit Edit wikicode ]

The term financial system refers to a relatively informal organization of financial markets. The financial system is the set of institutions that play a role in bank credit, stock markets, etc. Financial institutions are involved; The behavior of these institutions is regulated by the central bank and the financial authorities. Trust and reputation within the financial system play very important roles. Speculation relies heavily on leverage. The financial system is a complex system that makes compatible:

Savings of non-financial agents;
Investment in physical assets.

It allows the match between supply and demand for capital. Its deregulation can lead to troubles like the financial crisis from 2007 to 2011.

The actors of finance edit Edit wikicode ]

At the level of financial institutions, the system includes, inter alia, supra-national banks (eg European Central Bank, Bank for International Settlements), National Central Banks, commercial banks, financial companies, pension funds, Social security and provident funds, insurance companies, the Treasury, financial markets.

Financial globalization edit Edit wikicode ]

Given the extension of currency convertibility and the globalization of trade, finance is now international. The free movement of capital allows opacity on movements. The development of complex financial securities allows financial speculation. The emergence of complex international financial products and unregulated operators operating from tax havens has largely been associated with the development of the financial market crisis that is currently paralyzing the world economy, raising the question of the implementation of regulations Strengthened. Financial institutions have diversified and so banks are now seen to have risky activities. It is therefore very important to properly regulate the finance which must be more transparent to know who does what. It requires a strong regulatory action of the states.

Eurodollars and offshore finance edit Edit wikicode ]

It is an accounting writing game to make loans and deposits in dollars out of the US. They are therefore offshore banking without public control.

Financial analysis edit Edit wikicode ]

Financial analysis consists of an in-depth examination of a company’s accounts and prospects, in order to provide an assessment of the company, most of which is intended for current or potential future shareholders. The aim of this analysis is to provide a synthetic view, based on information from various sources, which highlights the reality of the situation and which should help the manager, the investor and the lender in their decision-making. The most frequently studied aspects are the profitability, the solvency and the liquidity of the activity.

Financial analysis is a prerequisite for many decisions in the life of a company: granting bank loans, issuing bonds and obtaining a rating, evaluating the company in the context of an assignment Or taxation, choice of financing, choice of a level of dividends, etc. The purpose of financial analysis is to diagnose the past in order to understand the present and try to foresee the future.

The risk edit Edit wikicode ]

Risk is the coexistence of a hazard and an issue. When a person takes a risk, they take action with a hope of gain and / or a possibility of loss. Financial rating agencies are used to inform financial markets about the financial risk of a number of players (private or public, including governments). They analyze this risk with more means than most investors and make their opinions available to all market participants.
Beyond the financial management of risks and the cleavage between financial and non-financial risks, the risk analysis of the company imposes an extended watch that can assimilate to economic intelligence. This prevention of the risks to the assets leads to the establishment of a risk grid with targeted watchdogs adapted to each type of risk (political, legal, social, environmental, etc.).
The phenomenon of cause and effect is more and more difficult to analyze with the systemic effect that financial globalization and the open or globalized economy can present.

It is therefore necessary to put in place controls to deal with successive crises. For example, Solvency II is a European regulatory reform of insurance. Its objective is to better adapt the capital requirements of insurance and reinsurance companies to the risks they incur in their business.

Financial crises edit Edit wikicode ]

The debate on the place of finance in the economy is revived whenever financial crises arise.

The financial crisis refers to a fairly large set of issues, including currency crises, banking crises and stock market crises, which are recurrent in stock market history. It also describes crises in the public debt or crises affecting a futures market, or even an agricultural product market, such as the tulipomania in the Netherlands in the seventeenth century.

If a financial crisis initially concerns only the financial markets, its aggravation will lead to adverse effects on the rest of the economy, resulting in an economic crisis or even a recession. These effects are generally a credit crunch and therefore a decline in investm

ent, a crisis of household confidence.

Recent crises include:

  • The October 1987 stock market crash
  • The 2001-2002 stock market crash
  • The 2007-2008 subprime crisis
  • The Greek crisis begun in 200
  • The Spanish crisis begun in 2010

 

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