Understanding the Behavior of Financial Markets

Finance is the science of money management. It differs from accounting in the sense that, while accounting aims at compiling and organizing past data, finance concentrates on what to do with it. For example, when a business needs funds to expand, they will approach a financial consultant who analyses their business plan to determine their maximum earning capacity and then applies these figures to their cash flow requirements. To ensure that the money is available when required, finance decides what needs to be done with the funds – either invest them or finance them.

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Understanding the Behavior of Financial Markets

Finance is the science of money management. It differs from accounting in the sense that, while accounting aims at compiling and organizing past data, finance concentrates on what to do with it. For example, when a business needs funds to expand, they will approach a financial consultant who analyses their business plan to determine their maximum earning capacity and then applies these figures to their cash flow requirements. To ensure that the money is available when required, finance decides what needs to be done with the funds – either invest them or finance them.

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One of the key areas of finance that is of growing importance due to increasing global competitiveness is finance risk management. This area encompasses a wide range of topics covering various aspects of finance including: credit risk, inflation risk, business cycles, market risks and credit default risks. The topics covered include: Credit Risk, Inflation Risk and Business Cycles. Other important topics in this area include: International Financing, Managerial Decision Making, Banking and Monetary Systems. These are only some of the many areas of finance that are of growing importance in today’s world.

74 Finance is an important consideration for companies when they are establishing their business. Examples of areas that are closely related to finance are: asset allocation, budgeting, financing, banking and economics. There are many other areas of finance that relate to specific industries. Some examples of such industries are: plastics, chemicals, engineering, pharmaceuticals, fruit and vegetable marketing, coal production and distribution, and healthcare.

75 The science of finance deals with the movement of money. Money, obviously, flows from one financial entity to another. They are used to buy assets, make loans, pay wages, and purchase other goods and services. Money, therefore, is a very abstract concept, and is not usually quantifiable. Many of the financial decisions that a company makes, however, are based on statistical measurements of potential revenue and expenses. One of the primary measurements of finance is known as the time value of money.

The time value of money is based on the efficiency of the managerial finance system. Time is money and, therefore, the efficiency of managerial finance will affect how money is allocated and spent. Time-based economics is a subset of economics that incorporates the financial aspects of the business into the broader area of economics.

The field of social finance focuses on the interactions among individuals. This area of economics considers how individual decisions, feelings, and behaviors impact the production and distribution of wealth. The scope of social finance includes everything that impacts the distribution of wealth including government programs, charity, informal arrangements between individuals, and even the choices made by large corporations. The scope of social finance has become more important as social issues have become a growing concern in society.

The field of behavioral economics examines why market participants make certain economic choices. Behavioral finance is an interesting branch of economics that explores why people make certain investment decisions. Behavioral economists attempt to understand why consumers and businesses choose to buy, sell, or save. They look closely at why these decisions are made and why market participants expect them to be made in certain ways. They are especially interested in studying why individual actions can affect the macroeconomy.

One branch of modern financial theories is the theory of asset pricing. This branch of modern financial theory studies the relationships between the supply of capital and the valuation of particular assets. These findings suggest that financial markets do not accurately reflect the real costs of making certain decisions. Asset pricing can help finance researchers discover cost-effective models for accounting and other economic tools.

Finance research deals primarily with how various economic decisions are made. Two main areas of modern finance research deal specifically with personal and corporate finance. Personal finance refers to individuals in both the private and public sectors making financial investments. Public finance studies for government and organizations in general. Private finance is focused on the decisions made by corporations and wealthy individuals. The study of these two main branches of modern finance contributes greatly to a better understanding of the world economy.

In modern economic terms, financial management refers to the ability of managers to organize, plan, and evaluate an enterprise’s financial assets and liabilities. Managers use financial management to align the goals and objectives of the organization with the resources available to realize those goals. The concepts of budgeting, investing, financing, and allocation are all part of modern financial management. Budgeting is concerned with the careful planning of how much money the business need in order to operate successfully; managing funds and budgeting are related closely with each other as well.

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