An easy way to describe finance would be to call it the science of managing money. Finance is concerned with arrangement, allocation, spending money with the motif of making a profit from the entire process. An important part of finance is an arrangement of resources. Another equally crucial part is that investment of those resources.
Financial activities include (but are not limited to) purchase or selling shares, equities, bonds, assets. It also includes loaning of money and maintenance of an account. The very objective of financial activities is to take care of all money-related needs.
What are the different types of finance?
Speaking from the perspective of a business organization, types or sources of finance can be two:
- Debt finance:
This includes borrowing money from what is known as external sources. External source in most cases is the bank.
- Equity Finance:
The other source of finance is equity or shares. A company can sell its shares to raise money.
What is an investment?
Just as a company can raise money by selling its shares, similarly, a company can also buy or invest in shares of another company. Investing in the shares of another company would earn a share in their profits (dividends). Not only companies but individuals can also invest in the share or stock of companies and earn dividends. Shares can also be sold at an appreciated price (unless the value of shares went down). A company or an individual can also invest in assets like real estate or gold.
Risks of Investment
The risks of investment are usually proportional to the returns. The riskier investment is, the greater the returns they usually offer. However, the amount of risk that one can take should depend on the time they have in their hands. If they can afford to invest for a considerably long period of time, it would be clever to invest in riskier ventures. However, for investors who need immediate returns or returns within a few years, low-risk forms of investment are recommended.
Why should we all invest?
Investment is the same as purchasing an asset whose price will keep rising through the years, provided you make the right purchase. Instead of keeping one’s money in the safe, it is always better to increase it by means of investment. It also allows a person to be an active participant in the economy.