The financial environment can be thought of as an enclosed sphere in which several interacting components exist together. Whether for personal or business financial management, an understanding of the six principles of finance is essential. Financial management is the effective and efficient control of cash and other financial assets in order to accomplish financial goals. Personal finance is concerned with how individuals invest and use their money to manage their debt and financial goals. Business finance studies and measures how a company can achieve financial stability and growth. Combined, the finances of individuals and businesses make up the economy of a particular region or the world. Thus the scope of a given financial environment can be small or large, depending on what it includes.
At A Glance
Finance has a complex definition, representing an environment, a career field, and personal and entrepreneurial investments.
- There are six foundational principles that can be used to study finance: money has a time value; the higher the reward, the greater the risk; diversification of investments can reduce overall risk; financial markets are efficient in pricing securities; a manager's and stockholders' objectives may differ; and reputation matters.
- There are a variety of specific financial markets that trade derivatives and securities. Some of these markets include the stock market, the capital market, the equity security market, primary markets, the bond market, the money market, the derivative security market, the debt security market, and the foreign exchange market.
Financial markets are interconnected, influence each other, and must function to create one larger global economy.
- Financial markets depend on individual investors, including their motivations and risk tolerance for loss.
- The financial environment needs investors with different levels of risk tolerance to satisfy a variety of lending needs, whether a corporation's or an individual's.