Basics of finance
Meaning of Finance 
 Finance is a management of money and other valuables, which can be easily converted into
cash. 
 Finance is concerned with the maintenance and creation of economic value or wealth.
 A science that describes the management, creation and study of money, banking, credit,
investments, assets and liabilities.

Features of Finance
 Channelizing funds- Financial sector and financial markets perform the essential function of
channeling funds from people who have surplus to people who have shortage.eg- mutual
fund
 Acquisition, Allocation & Utilization of funds- Business needs to decide about mode of
raising funds. once funds are acquired, they have to be allocated to various projects and
services. business should ensure that the funds are utilized efficiently and effectively to
achieve its objectives.
 Maximization of shareholder’s wealth- Finance helps in defining policies and efficient
management of working capital in order to achieve its wealth maximization objective.
  Future decision making- Finance is concerned with future decisions of organization. Sound
decision making is possible only through proper analysis of financial needs and availability.
E.g.- capital budgeting
 Optimal mix of funds- It is concerned with best optimal mix of funds in order to obtain
desired and determined results. The composition of funds should not result in loss.
 Investment opportunities- Investment means utilization of money for profit or returns.eg-
investment in mutual fund or financial securities or in land, etc.

Scope of Finance 
 Public finance- To deal with governmental financial problems, separate and specialized field
of finance has emerged as public finance with not for profit goals.
 Security and investment analysis- This area is of interest to individual and institutional
investors. It covers mainly measurement of risk and return on investment in securities.
 Institutional finance- It deals with issues of capital formation and the organizations that
perform the financing function of the economy.eg- banks
  International finance- It studies economic transactions among nations, corporations and
individually internationally. It is concerned with flows of money across international
boundaries.
 Financial management- Business firms face problems dealing with acquisition of funds and
optimum methods of employing the funds. Thus, it helps firm in seeking low cost funds for
individual firms and seek profitable business opportunities.
Financial terms everyone should know

1. Compound interest

 compound interest is interest on the amount of money you have deposited or

borrowed.

2. FICO score

 FICO is an acronym for Fair Isaac Crop, the company that came up with the
methodology for calculating a credit score.

 Your score is based on several factors, including payment history, the length of your
credit history and total amount owed.

 FICO scores range from 300 to 850, and the higher the score, the better the terms
you may receive on your next loan or credit card. People with scores below 620 may
have a harder time securing credit at a favorable interest rate.

3. Net worth

 Your net worth is simply the difference between your assets and liabilities.

4. Asset allocation

 Asset allocation is where you choose to put your money.

 The three major asset classes are stocks, bonds and cash.

5. Capital gains

 Capital gains are the difference between how much something is worth now versus how
much it was originally purchased for.

 The gain, however, is only on paper until the asset or investment is actually sold. The
flipside is a capital loss, which is the decrease in the asset’s or investment’s value since you
purchased it.

 You pay taxes on both short-term capital gains (a year or less) and long-term capital gains
(more than a year) when you sell an investment.
  By contrast, a capital loss could help reduce your taxes.

6. Rebalancing

 It is a standard practice in any portfolio. It is the process of bringing your stocks and
bonds back to your desired percentages.

7. Stock options

 Stock options can be offered by companies as management incentives. These

options give you the right (but not the obligation) to buy your employer’s stock at a
pre-set price within a specified time period.

8. Term life insurance

 Term life insurance provides coverage over a set period, generally anywhere from
five to 30 years.

 If you die within the set term, your beneficiaries receive a payout. If you don’t, the
policy expires with no value. The policy owner can decide to renew coverage after
the term is over and can cancel at any time without penalty.

9. EBITDA

 EBITDA stands for earnings before interest, taxes, depreciation, and

amortization and is calculated by subtracting operating expenses from revenue and
adding back depreciation and amortization to operating profit (aka EBIT).

 EBITDA can be used as a proxy for free cash flow (FCF) because it accounts for the
noncash expenses of depreciation and amortization.