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Finance

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ContentsArticlesIntroduction 1 2 2 11 11 15 15 18 18 26 31 34 56 56 64 64 72 72 75 75 79 79 80 80 89 89

Main articleFinance

The main techniques and sectors of the financial industryFinancial services

Personal financePersonal finance

Corporate financeCorporate finance Financial capital Cornering the market Insurance

Risk ManagementDerivative

Finance of statesPublic finance

Financial economicsFinancial economics

Financial mathematicsFinancial mathematics

Experimental financeExperimental finance

Behavioral financeBehavioral finance

Intangible asset financeIntangible asset finance

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ReferencesArticle Sources and Contributors Image Sources, Licenses and Contributors 92 94

Article LicensesLicense 95

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Introduction

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IntroductionNote. This book is based on the Wikipedia article, "Finance." The supporting articles are those referenced as major expansions of selected sections.

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Main articleFinanceFinance is the science of funds management.[1] The general areas of finance arebusiness finance, personal finance, and public finance.[2] Finance includes saving money and often includes lending money. The field of finance deals with the c

oncepts of time, money, risk and how they are interrelated. It also deals with how money is spent and budgeted. One facet of finance is through individuals andbusiness organizations, which deposit money in a bank. The bank then lends the money out to other individuals or corporations for consumption or investment andcharges interest on the loans. Loans have become increasingly packaged for resale, meaning that an investor buys the loan (debt) from a bank or directly from acorporation. Bonds are debt instruments sold to investors for organizations suchas companies, governments or charities.[3] The investor can then hold the debtand collect the interest or sell the debt on a secondary market. Banks are the main facilitators of funding through the provision of credit, although private equity, mutual funds, hedge funds, and other organizations have become important as they invest in various forms of debt. Financial assets, known as investments,

are financially managed with careful attention to financial risk management to control financial risk. Financial instruments allow many forms of securitized assets to be traded on securities exchanges such as stock exchanges, including debtsuch as bonds as well as equity in publicly traded corporations. Central banks,such as the Federal Reserve System banks in the United States and Bank of England in the United Kingdom, are strong players in public finance, acting as lenders of last resort as well as strong influences on monetary and credit conditionsin the economy.[4]

Overview of techniques and sectors of the financial industryAn entity whose income exceeds its expenditure can lend or invest the excess income. On the other hand, an entity whose income is less than its expenditure canraise capital by borrowing or selling equity claims, decreasing its expenses, or

increasing its income. The lender can find a borrower, a financial intermediarysuch as a bank, or buy notes or bonds in the bond market. The lender receives interest, the borrower pays a higher interest than the lender receives, and the financial intermediary earns the difference for arranging the loan. A bank aggregates the activities of many borrowers and lenders. A bank accepts deposits fromlenders, on which it pays interest. The bank then lends these deposits to borrowers. Banks allow borrowers and lenders, of different sizes, to coordinate theiractivity. Finance is used by individuals (personal finance), by governments (public finance), by businesses (corporate finance) and by a wide variety of other organizations, including schools and non-profit organizations. In general, the goals of each of the above activities are achieved through the use of appropriatefinancial instruments and methodologies, with consideration to their institutional setting. Finance is one of the most important aspects of business managementand includes decisions related to the use and acquisition of funds for the enterprise. In corporate finance, a company's capital structure is the total mix of financing methods it uses to raise funds. One method is debt financing, which includes bank loans and bond sales. Another method is equity financing - the sale of stock by a company to investors. Possession of stock gives the investor ownership in the company in proportion to the number of shares the investor owns. In return for the stock, the company receives cash, which it may use to

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Finance expand its business or to reduce its debt.[5] Investors, in both bonds and stock, may be institutional investors financial institutions such as investment banks and pension funds - or private individuals, called private investors orretail investors

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Personal financeQuestions in personal finance revolve around How much money will be needed byindividual (or by a family), and when? How can people protect themselves against unforeseen personal events, as well as those in the external economy? How canfamily assets best be transferred across generations (bequests and inheritance)?How does tax policy (tax subsidies or penalties) affect personal financial decisions? How does credit affect an individual's financial standing? How can one plan for a secure financial future in an environment of economic instability?

Personal financial decisions may involve paying for education, financing durablegoods such as real estate and cars, buying insurance, e.g. health and propertyinsurance, investing and saving for retirement. Personal financial decisions may

also involve paying for a loan, or debt obligations.

Corporate financeManagerial or corporate finance is the task of providing the funds for a corporation's activities. For small business, this is referred to as SME finance (Smalland Medium Enterprises). It generally involves balancing risk and profitability, while attempting to maximize an entity's wealth and the value of its stock. Long term funds are provided by ownership equity and long-term credit, often in the form of bonds. The balance between these elements forms the company's capitalstructure. Short-term funding or working capital is mostly provided by banks extending a line of credit. Another business decision concerning finance is investment, or fund management. An investment is an acquisition of an asset in the hopethat it will maintain or increase its value. In investment management in choosing

a portfolio one has to decide what, how much and when to invest. To do this, a company must: Identify relevant objectives and constraints: institution or individual goals, time horizon, risk aversion and tax considerations; Identify the appropriate strategy: active v. passive hedging strategy Measure the portfolio performance Financial management is duplicate with the financial function of the Accounting profession. However, financial accounting is more concerned with the reporting of historical financial information, while the financial decision is directed toward the future of the firm.

CapitalCapital, in the financial sense, is the money that gives the business the powerto buy goods to be used in the production of other goods or the offering of a service.

The desirability of budgetingBudget is a document which documents the plan of the business. This may includethe objective of business, targets set, and results in financial terms, e.g., the target set for sale, resulting cost, growth, required investment to achieve the planned sales, and financing source for the investment. Also budget may be long term or short term. Long term budgets have a time horizon of 510 years giving a vision to the company; short term is an annual budget which is drawn to control and operate in that particular year.

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Finance Capital budget This concerns proposed fixed asset requirements and how these expenditures will be financed. Capital budgets are often adjusted annuallyand should be part of a longer-term Capital Improvements Plan. Cash budget Working capital requirements of a business should be monitored at all times to ensurethat there are sufficient funds available to meet short-term expenses. The cashbudget is basically a detailed plan that shows all expected sources and uses ofcash. The cash budget has the following six main sections: 1. Beginning Cash Ba

lance - contains the last period's closing cash balance. 2. Cash collections - includes all expected cash receipts (all sources of cash for the period considered, mainly sales) 3. Cash disbursements - lists all planned cash outflows for theperiod, excluding interest payments on short-term loans, which appear in the financing section. All expenses that do not affect cash flow are excluded from this list (e.g. depreciation, amortization, etc.) 4. Cash excess or deficiency - afunction of the cash needs and cash available. Cash needs are determined by thetotal cash disbursements plus the minimum cash balance required by company policy. If total cash available is less than cash needs, a deficiency exists. 5. Financing - discloses the planned borrowings and repayments, including interest. 6.Ending Cash balance - simply reveals the planned ending cash balance.

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Management of current assetsCredit policy Credit gives the consumer the opportunity to buy, purchase or acquire goods and services, and pay for them at a later date. This has its advantages and disadvantages as follows: Advantages of credit trade Usually resre customers than cash trade. Can charge more for goods to cover the risk of baddebt. Gain goodwill and loyalty of customers. People can buy goods and pay forthem at a later date. Farmers can buy seeds and implements, and pay for them only after the harvest. Stimulates agricultural and industrial production and commerce. Can be used as a promotional tool. Increase the sales. Modest rates to be filled. can be a marketing tool

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Finance Disadvantages of credit trade Risk of bad debt. High administration expenses. People can buy more than they can afford. More working capital needed. Risk of Bankruptcy.

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Forms of credit Suppliers credit: Credit on ordinary open account Instal

les Bills of exchange Credit cards Contractor's credit Factoring of debtors Cashcredit Cpf credits

Exchange of product Factors which influence credit conditions Nature oness's activities Financial position Product durability Length of production process Competition and competitors' credit conditions Country's economic positionConditions at financial institutions Discount for early payment Debtor's type ofbusiness and financial position

Credit collection Overdue accounts Attach a notice of overdue account to statement. Send a letter asking for settlement of debt. Send a second or third letter if first is ineffectual. Threaten legal actions.

Effective credit control Increases sales Reduces bad debts Increases profits Blds customer loyalty Builds confidence of financial industry Increase company capitalisation

Increase the customer relationship

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Finance Sources of information on creditworthiness Business references Bank rerences Credit agencies Chambers of commerce Employers Credit application forms

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Duties of the credit department Legal action Taking necessary steps to ensttlement of account Knowing the credit policy and procedures for credit control

Setting credit limits Ensuring that statements of account are sent out Ensuringthat thorough checks are carried out on credit customers Keeping records of allamounts owing Ensuring that debts are settled promptly

Timely reporting to the upper level of management for better management. Stock Purpose of stock control Ensures that enough stock is on hand to satisfy demand.Protects and monitors theft. Safeguards against having to stockpile. Allows forcontrol over selling and cost price.

Stockpiling This refers to the purchase of stock at the right time, at the rightprice and in the right quantities. There are several advantages to the stockpiling, the following are some of the examples: Losses due to price fluctuations an

d stock loss kept to a minimum Ensures that goods reach customers timeously; better service Saves space and storage cost Investment of working capital kept to minimum No loss in production due to delays

There are several disadvantages to the stockpiling, the following are some of the examples: Obsolescence Danger of fire and theft Initial working capital investment is very large Losses due to price fluctuation

Rate of stock turnover This refers to the number of times per year that the average level of stock is sold. It may be worked out by dividing the cost price of goods sold by the cost price of the average stock level. Determining optimum stock levels Maximum stock level refers to the maximum stock level that may be maintained to ensure cost effectiveness. Minimum stock level refers to the point belo

w which the stock level may not go. Standard order refers to the amount of stockgenerally ordered.

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Finance Order level refers to the stock level which calls for an order to be made. Cash Reasons for keeping cash Cash is usually referred to as the "king" in finance, as it is the most liquid asset. The transaction motive refers to the money kept available to pay expenses. The precautionary motive refers to the money kept aside for unforeseen expenses. The speculative motive refers to the money kept aside to take advantage of suddenly arising opportunities.

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Advantages of sufficient cash Current liabilities may be catered for meetingcurrent obligations of the company Cash discounts are given for cash payments.Production is kept moving Surplus cash may be invested on a short-term basis. The business is able to pay its accounts in a timely manner, allowing for easily obtained credit. Liquidity Quick upfront pay.

Management of fixed assetsDepreciation Depreciation is the allocation of the cost of an asset over its useful life as determined at the time of purchase. It is calculated yearly to enforce the matching principle Insurance Insurance is the undertaking of one party to

indemnify another, in exchange for a premium, against a certain eventuality. Uninsured risks Bad debt Changes in fashion Time lapses between ordering and delivery New machinery or technology Different prices at different places

Requirements of an insurance contract Insurable interest The insured must derivea real financial gain from that which he is insuring, or stand to lose if it isdestroyed or lost. The item must belong to the insured. One person may take outinsurance on the life of another if the second party owes the first money. Mustbe some person or item which can, legally, be insured. The insured must have alegal claim to that which he is insuring. Good faith Uberrimae fidei refers to absolute honesty and must characterise the dealings of both the insurer and the insured.

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Finance

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Shared ServicesThere is currently a move towards converging and consolidating Finance provisions into shared services within an organization. Rather than an organization havin

g a number of separate Finance departments performing the same tasks from different locations a more centralized version can be created.

Finance of public entitiesPublic finance describes finance as related to sovereign states and sub-nationalentities (states/provinces, counties, municipalities, etc.) and related publicentities (e.g. school districts) or agencies. It is concerned with: Identification of required expenditure of a public sector entity Source(s) of that entity'srevenue The budgeting process Debt issuance (municipal bonds) for public works projects

Financial economics

Financial economics is the branch of economics studying the interrelation of financial variables, such as prices, interest rates and shares, as opposed to thoseconcerning the real economy. Financial economics concentrates on influences ofreal economic variables on financial ones, in contrast to pure finance. It studies: Valuation - Determination of the fair value of an asset How risky is the asset? (identification of the asset-appropriate discount rate) What cash flows willit produce? (discounting of relevant cash flows) How does the market price compare to similar assets? (relative valuation) Are the cash flows dependent on someother asset or event? (derivatives, contingent claim valuation)

Financial markets and instruments Commodities - topics Stocks - topics Bonds -opics Money market instruments- topics Derivatives - topics

Financial institutions and regulation Financial Econometrics is the branch of Financial Economics that uses econometric techniques to parameterise the relationships.

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Finance

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Financial mathematicsFinancial mathematics is a main branch of applied mathematics concerned with thefinancial markets. Financial mathematics is the study of financial data with th

e tools of mathematics, mainly statistics. Such data can be movements of securitiesstocks and bonds etc.and their relations. Another large subfield is insurance mathematics. This is also known as quantitative finance, practitioners as Quantitative analysts.

Experimental financeExperimental finance aims to establish different market settings and environments to observe experimentally and provide a lens through which science can analyzeagents' behavior and the resulting characteristics of trading flows, information diffusion and aggregation, price setting mechanisms, and returns processes. Researchers in experimental finance can study to what extent existing financial economics theory makes valid predictions, and attempt to discover new principles o

n which such theory can be extended. Research may proceed by conducting tradingsimulations or by establishing and studying the behaviour of people in artificial competitive market-like settings.

Behavioral financeBehavioral Finance studies how the psychology of investors or managers affects financial decisions and markets. Behavioral finance has grown over the last few decades to become central to finance. Behavioral finance includes such topics as:1. 2. 3. 4. Empirical studies that demonstrate significant deviations from classical theories. Models of how psychology affects trading and prices Forecastingbased on these methods. Studies of experimental asset markets and use of modelsto forecast experiments.

A strand of behavioral finance has been dubbed Quantitative Behavioral Finance,which uses mathematical and statistical methodology to understand behavioral biases in conjunction with valuation. Some of this endeavor has been led by GunduzCaginalp (Professor of Mathematics and Editor of Journal of Behavioral Finance during 2001-2004) and collaborators including Vernon Smith (2002 Nobel Laureate in Economics), David Porter, Don Balenovich, Vladimira Ilieva, Ahmet Duran). Studies by Jeff Madura, Ray Sturm and others have demonstrated significant behavioral effects in stocks and exchange traded funds. Among other topics, quantitativebehavioral finance studies behavioral effects together with the non-classical assumption of the finiteness of assets.

Intangible Asset FinanceIntangible asset finance is the area of finance that deals with intangible assets such as patents, trademarks, goodwill, reputation, etc.

Related professional qualificationsThere are several related professional qualifications in finance, that can leadto the field: Accountancy: Qualified accountant: Chartered Accountant (ACA - UKcertification / CA - certification in Commonwealth countries), Chartered Certified Accountant (ACCA, UK certification), Certified Public Accountant (CPA, US certification),ACMA/FCMA ( Associate/Fellow Chartered Management Accountant) from Chartered Institute of Management Accountant(CIMA) ,UK. Non-statutory qualifications: Chartered Cost Accountant CCA Designation from AAFM Business qualifications: Master of Business Administration (MBA), Bachelor of Business Management (BBM), Master of Commerce (M.Comm), Master of Science in Management (MSM), Doctor of

Business Administration

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Finance (DBA) Generalist Finance qualifications: Degrees: Masters degree in Finance (MSF), Master of Financial Economics, Master of Finance & Control (MFC), Master Financial Manager (MFM), Master of Financial Administration (MFA) Certifications: Chartered Financial Analyst (CFA), Certified International Investment Analyst (CIIA), Association of Corporate Treasurers (ACT), Certified Market Analyst(CMA/FAD) Dual Designation, Corporate Finance Qualification (CF) Quantitative Finance qualifications: Master of Science in Financial Engineering (MSFE), Master

of Quantitative Finance (MQF), Master of Computational Finance (MCF), Master ofFinancial Mathematics (MFM), Certificate in Quantitative Finance (CQF).

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See also Financial crisis of 20072010

References[1] Gove, P. et al. 1961. Finance. Webster's Third New International Dictionaryof the English Language Unabridged. Springfield, Massachusetts: G. & C. MerriamCompany. [2] finance. (2009). In Encyclopdia Britannica. Retrieved June 23, 2009,

from Encyclopdia Britannica Online: Finance (http:/ / www. britannica. com/ EBchecked/ topic/ 207147/ finance) [3] Charitytimes.com (http:/ / www. charitytimes.com/ pages/ ct_news/ news archive/ July_06_news/ 030706_wellcome_trust_charity_bond. htm) [4] Board of Governors of Federal Reserve System of the United States. Mission of the Federal Reserve System. Federalreserve.gov (http:/ / www. federalreserve. gov/ aboutthefed/ mission. htm) Accessed: 2010-01-16. (Archived by WebCite at Webcitation.org (http:/ / www. webcitation. org/ 5mpS52OAl)) [5] Business.timesonline.co.uk (http:/ / business. timesonline. co. uk/ tol/ business/ industry_sectors/ natural_resources/ article5602963. ece)

External links OECD work on financial markets (http://www.oecd.org/finance) Wharton Finance Knowledge Project (http://knowledge.wharton.upenn.edu/category.cfm?cid=1) - aimed t

o offer free access to finance knowledge for students, teachers, and self-learners. Professor Aswath Damodaran (http://pages.stern.nyu.edu/~adamodar/) (New YorkUniversity Stern School of Business) - provides resources covering three areasin finance: corporate finance, valuation and investment management and syndicatefinance.

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The main techniques and sectors of the financial industryFinancial servicesFinancial services refer to services provided by the finance industry. The finance industry encompasses a broad range of organizations that deal with the management of money. Among these organizations are banks, credit card companies, insur

ance companies, consumer finance companies, stock brokerages, investment funds and some government sponsored enterprises. As of 2004, the financial services industry represented 20% of the market capitalization of the S&P 500 in the UnitedStates.[1]

History of financial servicesIn the United StatesThe term "financial services" became more prevalent in the United States partlyas a result of the Gramm-Leach-Bliley Act of the late 1990s, which enabled different types of companies operating in the U.S. financial services industry at that time to merge. Companies usually have two distinct approaches to this new typeof business. One approach would be a bank which simply buys an insurance compan

y or an investment bank, keeps the original brands of the acquired firm, and adds the acquisition to its holding company simply to diversify its earnings. Outside the U.S. (e.g., in Japan), non-financial services companies are permitted within the holding company. In this scenario, each company still looks independent,and has its own customers, etc. In the other style, a bank would simply createits own brokerage division or insurance division and attempt to sell those products to its own existing customers, with incentives for combining all things withone company.

BanksA "commercial bank" is what is commonly referred to as simply a "bank". The term"commercial" is used to distinguish it from an "investment bank," a type of financial services entity which, instead of lending money directly to a business, h

elps businesses raise money from other firms in the form of bonds (debt) or stock (equity).

Banking servicesThe primary operations of banks include: Keeping money safe while also allowingwithdrawals when needed Issuance of checkbooks so that bills can be paid and other kinds of payments can be delivered by post Provide personal loans, commercialloans, and mortgage loans (typically loans to purchase a home, property or business) Issuance of credit cards and processing of credit card transactions and billing Issuance of debit cards for use as a substitute for checks Allow financialtransactions at branches or by using Automatic Teller Machines (ATMs) Provide wire transfers of funds and Electronic fund transfers between banks Facilitationof standing orders and direct debits, so payments for bills can be made automatically Provide overdraft agreements for the temporary advancement of the Bank's own money to meet monthly spending commitments of a customer in their current account.

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Financial services Provide Charge card advances of the Bank's own money for customers wishing to settle credit advances monthly. Provide a check guaranteed by the Bank itself and prepaid by the customer, such as a cashier's check or certified check. Notary service for financial and other documents

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Other types of bank services Private banking - Private banks provide banking services exclusively to high networth individuals. Many financial services firms require a person or family tohave a certain minimum net worth to qualify for private banking services.[2] Private banks often provide more personal services, such as wealth management and tax planning, than normal retail banks.[3] Capital market bank - bank that underwrite debt and equity, assist company deals (advisory services, underwriting andadvisory fees), and restructure debt into structured finance products. Bank cards - include both credit cards and debit cards. Bank Of America is the largest issuer of bank cards. Credit card machine services and networks - Companies whichprovide credit card machine and payment networks call themselves "merchant cardproviders".

Foreign exchange servicesForeign exchange services are provided by many banks around the world. Foreign exchange services include: Currency Exchange - where clients can purchase and sell foreign currency banknotes. Wire transfer - where clients can send funds to international banks abroad. Foreign Currency Banking - banking transactions are done in foreign currency.

Investment services Asset management - the term usually given to describe companies which run collective investment funds. Also refers to services provided by others, generally registered with the Securities and Exchange Commission as Registered Investment Advisors. Hedge fund management - Hedge funds often employ the services of "prime b

rokerage" divisions at major investment banks to execute their trades. Custody services - the safe-keeping and processing of the world's securities trades and servicing the associated portfolios. Assets under custody in the world are approximately $100 trillion.[4]

Insurance Insurance brokerage - Insurance brokers shop for insurance (generally corporateproperty and casualty insurance) on behalf of customers. Recently a number of websites have been created to give consumers basic price comparisons for servicessuch as insurance, causing controversy within the industry.[5] Insurance underwriting - Personal lines insurance underwriters actually underwrite insurance forindividuals, a service still offered primarily through agents, insurance brokers, and stock brokers. Underwriters may also offer similar commercial lines of coverage for businesses. Activities include insurance and annuities, life insurance, retirement insurance, health insurance, and property & casualty insurance. Reinsurance - Reinsurance is insurance sold to insurers themselves, to protect themfrom catastrophic losses.

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Financial services

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Other financial services Intermediation or advisory services - These services involve stock brokers (private client services) and discount brokers. Stock brokers assist investors in buy

ing or selling shares. Primarily internet-based companies are often referred toas discount brokerages, although many now have branch offices to assist clients.These brokerages primarily target individual investors. Full service and private client firms primarily assist and execute trades for clients with large amounts of capital to invest, such as large companies, wealthy individuals, and investment management funds. Private equity - Private equity funds are typically closed-end funds, which usually take controlling equity stakes in businesses that areeither private, or taken private once acquired. Private equity funds often useleveraged buyouts (LBOs) to acquire the firms in which they invest. The most successful private equity funds can generate returns significantly higher than provided by the equity markets Venture capital is a type of private equity capital typically provided by professional, outside investors to new, high-potential-grow

th companies in the interest of taking the company to an IPO or trade sale of the business. Angel investment - An angel investor or angel (known as a business angel or informal investor in Europe), is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. A small but increasing number of angel investors organize themselvesinto angel groups or angel networks to share research and pool their investmentcapital. Conglomerates - A financial services conglomerate is a financial services firm that is active in more than one sector of the financial services markete.g. life insurance, general insurance, health insurance, asset management, retail banking, wholesale banking, investment banking, etc. A key rationale for theexistence of such businesses is the existence of diversification benefits thatare present when different types of businesses are aggregated i.e. bad things don't always happen at the same time. As a consequence, economic capital for a con

glomerate is usually substantially less than economic capital is for the sum ofits parts. Debt resolution is a consumer service that assists individuals that have too much debt to pay off as requested, but do not want to file bankruptcy and wish to payoff their debts owed. This debt can be accrued in various ways including but not limited to personal loans, credit cards or in some cases merchantaccounts. There are many services/companies that can assist with this. These caninclude debt consolidation, debt settlement and refinancing.

Financial crimeUKFraud within the financial industry costs the UK an estimated 14bn a year and itis believed a further 25bn is laundered by British institutions.[6]

Market shareThe financial services industry constitutes the largest group of companies in the world in terms of earnings and equity market cap. However it is not the largest category in terms of revenue or number of employees. It is also a slow growingand extremely fragmented industry, with the largest company (Citigroup), only having a 3 % US market share.[7] In contrast, the largest home improvement storein the US, Home Depot, has a 30 % market share, and the largest coffee house Starbucks has a 32 % market share.

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Financial services

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See also Accounting scandals Alternative financial services BFSI Euces Roundtable Financial analyst Financial data vendors Financial markets Financ

ialization Financial transaction tax Government sponsored enterprise Institutional customers International Monetary Fund Investment management List of banks List of investment banks Misleading financial analysis

Thomson Financial League Tables

References[1] "The Mistakes Of Our Grandparents?" (http:/ / www. contraryinvestor. com/ 2004archives/ mofeb04. htm). Contrary Investor.com. February 2004. . Retrieved 2009-02-06. [2] "Private Banking definition" (http:/ / www. investorwords. com/ 5946/ private_banking. html). Investor Words.com. . Retrieved 2009-02-06. [3] "HowSwiss Bank Accounts Work" (http:/ / money. howstuffworks. com/ personal-finance/

banking/ swiss-bank-account. htm). How Stuff Works. . Retrieved 2009-02-06. [4]http:/ / www. globalcustody. net/ no_cookie/ custody_assets_worldwide/ GlobalCustody.net Asset Table [5] "Price comparison sites face probe" (http:/ / news. bbc. co. uk/ 1/ hi/ business/ 7201345. stm). BBC News. 2008-01-22. . Retrieved 2009-02-06. [6] "Watchdog warns of criminal gangs inside banks" (http:/ / money. guardian. co. uk/ news_/ story/ 0,1456,1643860,00. html). The Guardian (London). 2005-11-16. . Retrieved 2007-11-30. [7] The Opportunity: Small Global Market Share (http:/ / www. citigroup. com/ citigroup/ fin/ data/ p040602. pdf), Page 11, from the Sanford C. Bernstein & Co. Strategic Decisions Conference - 6/02/04

Porteous, Bruce T.; Pradip Tapadar (December 2005). Economic Capital and Financial Risk Management for Financial Services Firms and Conglomerates. Palgrave Macmillan. ISBN 1-4039-3608-0. Schoppmann, Henning (Edit.); Julien Ernoult, Walburga H

emetsberger, Christoph Wengler (September 2008). European Banking and FinancialServices Law - Third Edition. Larcier. ISBN 2-8044-3180-0.

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Personal financePersonal financePersonal finance is the application of the principles of finance to the monetarydecisions of an individual or family unit. It addresses the ways in which individuals or families obtain, budget, save, and spend monetary resources over time,

taking into account various financial risks and future life events. Componentsof personal finance might include checking and savings accounts, credit cards and consumer loans, investments in the stock market, retirement plans, social security benefits, insurance policies, and income tax management.

Personal financial planningA key component of personal finance is financial planning, a dynamic process that requires regular monitoring and reevaluation. In general, it has five steps: 1. Assessment: One's personal financial situation can be assessed by compiling simplified versions of financial balance sheets and income statements. A personalbalance sheet lists the values of personal assets (e.g., car, house, clothes, stocks, bank account), along with personal liabilities (e.g., credit card debt, ba

nk loan, mortgage). A personal income statement lists personal income and expenses. 2. Setting goals: Two examples are "retire at age 65 with a personal net worth of $1,000,000" and "buy a house in 3 years paying a monthly mortgage servicing cost that is no more than 25% of my gross income". It is not uncommon to haveseveral goals, some short term and some long term. Setting financial goals helpsdirect financial planning. 3. Creating a plan: The financial plan details how to accomplish your goals. It could include, for example, reducing unnecessary expenses, increasing one's employment income, or investing in the stock market. 4.Execution: Execution of one's personal financial plan often requires disciplineand perseverance. Many people obtain assistance from professionals such as accountants, financial planners, investment advisers, and lawyers. 5. Monitoring andreassessment: As time passes, one's personal financial plan must be monitored for possible adjustments or reassessments. Typical goals most adults have are payi

ng off credit card and or student loan debt, retirement, college costs for children, medical expenses, and estate planning. The six key areas of personal financial planning, as suggested by the Financial Planning Standards Board, are: 1 - Financial Position: this area is concerned with understanding the personal resources available by examining net worth and household cash flow. Net worth is a person's balance sheet, calculated by adding up all assets under that person's control, minus all liabilities of the household, at one point in time. Household cash flow totals up all the expected sources of income within a year, minus all expected expenses within the same year. From this analysis, the financial planner can determine to what degree and in what time the personal goals can be accomplished. 2 - Adequate Protection: the analysis of how to protect a household from unforeseen risks. These risks can be divided into liability, property, death, disability, health and long term care. Some of these risks may be self-insurable, while most will require the purchase of an insurance contract. Determining how much insurance to get, at the most cost effective terms requires knowledge of the market for personal insurance. Business owners, professionals, athletes and entertainers require specialized insurance professionals to adequately protect themselves. Since insurance also enjoys some tax benefits, utilizing insurance investment products may be a critical piece of the overall investment planning.

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Personal finance 3 - Tax Planning: typically the income tax is the single largest expense in a household. Managing taxes is not a question of if you will pay taxes, but when and how much. Government gives many incentives in the form of taxdeductions and credits, which can be used to reduce the lifetime tax burden. Most modern governments use a progressive tax. Typically, as your income grows, youpay a higher marginal rate of tax. Understanding how to take advantage of the myriad tax breaks when planning your personal finances can make a significant imp

act upon your success. 4 - Investment and Accumulation Goals: planning how to accumulate enough money to acquire items with a high price is what most people consider to be financial planning. The major reasons to accumulate assets is for the following: a - purchasing a house b - purchasing a car c - starting a businessd - paying for education expenses e accumulating money for retirement, to generate a stream of income to cover lifestyle expenses. Achieving these goals requires projecting what they will cost, and when you need to withdraw funds. A majorrisk to the household in achieving their accumulation goal is the rate of priceincreases over time, or inflation. Using net present value calculators, the financial planner will suggest a combination of asset earmarking and regular savingsto be invested in a variety of investments. In order to overcome the rate of inflation, the investment portfolio has to get a higher rate of return, which typi

cally will subject the portfolio to a number of risks. Managing these portfoliorisks is most often accomplished using asset allocation, which seeks to diversify investment risk and opportunity. This asset allocation will prescribe a percentage allocation to be invested in stocks, bonds, cash and alternative investments. The allocation should also take into consideration the personal risk profileof every investor, since risk attitudes vary from person to person. 5 - Retirement Planning: retirement planning is the process of understanding how much it costs to live at retirement, and coming up with a plan to distribute assets to meetany income shortfall. 6 - Estate Planning: involves planning for the disposition of your asset when you die. Typically, there is a tax due to the state or federal government at your death. Avoiding these taxes means that more of your assets will be distributed to your heirs. You can leave your assets to family, friends or charitable groups.

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See also Accounting software Corporate finance Credit card debt Dinvestment Financial literacy Financial Literacy Month Family planning Insurance Investment List of personal finance related articles Mortgage loan Payday loanPension Personal budget Personal financial management Separately managed account

Settlement (finance) Wealth Wealth management

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Corporate financeCorporate financeCorporate finance[1] is the field of finance dealing with financial decisions that business enterprises make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximize corporate value [2] w

hile managing the firm's financial risks. Although it is in principle differentfrom managerial finance which studies Domestic credit to private sector in 2005.the financial decisions of all firms, rather than corporations alone, the mainconcepts in the study of corporate finance are applicable to the financial problems of all kinds of firms. The discipline can be divided into long-term and short-term decisions and techniques. Capital investment decisions are long-term choices about which projects receive investment, whether to finance that investmentwith equity or debt, and when or whether to pay dividends to shareholders. On the other hand, short term decisions deal with the short-term balance of current assets and current liabilities; the focus here is on managing cash, inventories,and short-term borrowing and lending (such as the terms on credit extended to customers). The terms corporate finance and corporate financier are also associate

d with investment banking. The typical role of an investment bank is to evaluatethe company's financial needs and raise the appropriate type of capital that best fits those needs. Thus, the terms corporate finance and corporate financier may be associated with transactions in which capital is raised in order to create, develop, grow or acquire businesses.

Capital investment decisionsCapital investment decisions [3] are long-term corporate finance decisions relating to fixed assets and capital structure. Decisions are based on several inter-related criteria. (1) Corporate management seeks to maximize the value of the firm by investing in projects which yield a positive net present value when valuedusing an appropriate discount rate. (2) These projects must also be financed appropriately. (3) If no such opportunities exist, maximizing shareholder value di

ctates that management must return excess cash to shareholders (i.e., distribution via dividends). Capital investment decisions thus comprise an investment decision, a financing decision, and a dividend decision.

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The investment decisionManagement must allocate limited resources between competing opportunities (projects) in a process known as capital budgeting. [4] Making this investment, or ca

pital allocation, decision requires estimating the value of each opportunity orproject, which is a function of the size, timing and predictability of future cash flows. Project valuation In general [5] , each project's value will be estimated using a discounted cash flow (DCF) valuation, and the opportunity with the highest value, as measured by the resultant net present value (NPV) will be selected (applied to Corporate Finance by Joel Dean in 1951; see also Fisher separation theorem, John Burr Williams: theory). This requires estimating the size and timing of all of the incremental cash flows resulting from the project. Such future cash flows are then discounted to determine their present value (see Time value of money). These present values are then summed, and this sum net of the initial investment outlay is the NPV. See Financial modeling. The NPV is greatly affected by the discount rate. Thus, identifying the proper discount rate - often t

ermed, the project "hurdle rate" [6] - is critical to making an appropriate decision. The hurdle rate is the minimum acceptable return on an investmenti.e. the project appropriate discount rate. The hurdle rate should reflect the riskiness of the investment, typically measured by volatility of cash flows, and must takeinto account the financing mix. Managers use models such as the CAPM or the APTto estimate a discount rate appropriate for a particular project, and use the weighted average cost of capital (WACC) to reflect the financing mix selected. (Acommon error in choosing a discount rate for a project is to apply a WACC that applies to the entire firm. Such an approach may not be appropriate where the risk of a particular project differs markedly from that of the firm's existing portfolio of assets.) In conjunction with NPV, there are several other measures usedas (secondary) selection criteria in corporate finance. These are visible fromthe DCF and include discounted payback period, IRR, Modified IRR, equivalent ann

uity, capital efficiency, and ROI. Alternatives (complements) to NPV include MVA/ EVA (Joel Stern, Stern Stewart & Co) and APV (Stewart Myers). See list of valuation topics. Valuing flexibility In many cases, for example R&D projects, a project may open (or close) the paths of action to the company, but this reality will not typically be captured in a strict NPV approach.[7] Management will therefore (sometimes) employ tools which place an explicit value on these options. So, whereas in a DCF valuation the most likely or average or scenario specific cash flows are discounted, here the flexibile and staged nature of the investment ismodelled, and hence "all" potential payoffs are considered. The difference between the two valuations is the "value of flexibility" inherent in the project. Thetwo most common tools are Decision Tree Analysis (DTA) [8] [9] and Real optionsanalysis (ROA); [10] they may often be used interchangeably: DTA values flexibility by incorporating possible events (or states) and consequent management decisions. (For example, a company would build a factory given that demand for its product exceeded a certain level during the pilot-phase, and outsource productionotherwise. In turn, given further demand, it would similarly expand the factory, and maintain it otherwise. In a DCF model, by contrast, there is no "branching" - each scenario must be modelled separately.) In the decision tree, each management decision in response to an "event" generates a "branch" or "path" which the company could follow; the probabilities of each event are determined or specified by management. Once the tree is constructed: (1) "all" possible events and their resultant paths are visible to management; (2) given this knowledge of the events that could follow, and assuming rational decision making, management chooses the actions corresponding to the highest value path probability weighted; (3)this path is then taken as representative of project value. See Decision theory:

Choice under uncertainty. ROA is usually used when the value of a project is contingent on the value of some other asset or underlying variable. (For example,the viability of a mining project is contingent on the price of gold; if the pri

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ce is too low,

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Corporate finance management will abandon the mining rights, if sufficiently high, management will develop the ore body. Again, a DCF valuation would capture only one of these outcomes.) Here: (1) using financial option theory as a framework, the decision to be taken is identified as corresponding to either a call option or a put option; (2) an appropriate valuation technique is then employed - usually a variant on the Binomial options model or a bespoke simulation model, while Black Scholes type formulae are used less often; see Contingent claim valuati

on. (3) The "true" value of the project is then the NPV of the "most likely" scenario plus the option value. (Real options in corporate finance were first discussed by Stewart Myers in 1977; viewing corporate strategy as a series of optionswas originally per Timothy Luehrman, in the late 1990s.) Quantifying uncertainty Given the uncertainty inherent in project forecasting and valuation,[11] [9] analysts will wish to assess the sensitivity of project NPV to the various inputs(i.e. assumptions) to the DCF model. In a typical sensitivity analysis the analyst will vary one key factor while holding all other inputs constant, ceteris paribus. The sensitivity of NPV to a change in that factor is then observed, and is calculated as a "slope": NPV / factor. For example, the analyst will determine NPV at various growth rates in annual revenue as specified (usually at set increments, e.g. -10%, -5%, 0%, 5%....), and then determine the sensitivity using this

formula. Often, several variables may be of interest, and their various combinations produce a "value-surface" (or even a "value-space"), where NPV is then a function of several variables. See also Stress testing. Using a related technique, analysts also run scenario based forecasts of NPV. Here, a scenario comprisesa particular outcome for economy-wide, "global" factors (demand for the product,exchange rates, commodity prices, etc...) as well as for company-specific factors (unit costs, etc...). As an example, the analyst may specify various revenuegrowth scenarios (e.g. 5% for "Worst Case", 10% for "Likely Case" and 25% for "Best Case"), where all key inputs are adjusted so as to be consistent with the growth assumptions, and calculate the NPV for each. Note that for scenario based analysis, the various combinations of inputs must be internally consistent, whereas for the sensitivity approach these need not be so. An application of this methodology is to determine an "unbiased" NPV, where management determines a (subje

ctive) probability for each scenario the NPV for the project is then the probability-weighted average of the various scenarios. A further advancement is to construct stochastic or probabilistic financial models as opposed to the traditionalstatic and deterministic models as above. For this purpose, the most common method is to use Monte Carlo simulation to analyze the projects NPV. This method wasintroduced to finance by David B. Hertz in 1964, although has only recently become common: today analysts are even able to run simulations in spreadsheet basedDCF models, typically using an add-in, such as Crystal Ball. Here, the cash flow components that are (heavily) impacted by uncertainty are simulated, mathematically reflecting their "random characteristics". In contrast to the scenario approach above, the simulation produces several thousand random but possible outcomes, or "trials"; see Monte Carlo Simulation versus What If Scenarios. The output is then a histogram of project NPV, and the average NPV of the potential investment as well as its volatility and other sensitivities is then observed. This histogram provides information not visible from the static DCF: for example, it allows for an estimate of the probability that a project has a net present value greater than zero (or any other value). Continuing the above example: instead of assigning three discrete values to revenue growth, and to the other relevant variables, the analyst would assign an appropriate probability distribution to each variable (commonly triangular or beta), and, where possible, specify the observedor supposed correlation between the variables. These distributions would then be "sampled" repeatedly - incorporating this correlation - so as to generate several thousand random but possible scenarios, with corresponding valuations, whichare then used to generate the NPV histogram. The resultant statistics (averageNPV and standard deviation of NPV) will be a more accurate mirror of the project

s "randomness" than the variance observed under the scenario based approach. These are often used as estimates of the underlying "spot price" and volatility for the real option valuation as above; see Real options valuation: Valuation inpu

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The financing decisionAchieving the goals of corporate finance requires that any corporate investmentbe financed appropriately. [12] As above, since both hurdle rate and cash flows

(and hence the riskiness of the firm) will be affected, the financing mix can impact the valuation. Management must therefore identify the "optimal mix" of financingthe capital structure that results in maximum value. (See Balance sheet, WACC, Fisher separation theorem; but, see also the Modigliani-Miller theorem.) Thesources of financing will, generically, comprise some combination of debt and equity financing. Financing a project through debt results in a liability or obligation that must be serviced, thus entailing cash flow implications independent of the project

s degree of success. Equity financing is less risky with respect to cash flow commitments, but results in a dilution of ownership, control and earnings. The cost of equity is also typically higher than the cost of debt (see CAPM and WACC), and so equity financing may result in an increased hurdle rate which may offset any reduction in cash flow risk. Management must also attempt to m

atch the financing mix to the asset being financed as closely as possible, in terms of both timing and cash flows. One of the main theories of how firms make their financing decisions is the Pecking Order Theory, which suggests that firms avoid external financing while they have internal financing available and avoid new equity financing while they can engage in new debt financing at reasonably low interest rates. Another major theory is the Trade-Off Theory in which firms are assumed to trade-off the tax benefits of debt with the bankruptcy costs of debt when making their decisions. An emerging area in finance theory is right-financing whereby investment banks and corporations can enhance investment return andcompany value over time by determining the right investment objectives, policyframework, institutional structure, source of financing (debt or equity) and expenditure framework within a given economy and under given market conditions. Onelast theory about this decision is the Market timing hypothesis which states th

at firms look for the cheaper type of financing regardless of their current levels of internal resources, debt and equity.

The dividend decisionWhether to issue dividends,[13] and what amount, is calculated mainly on the basis of the company

s unappropriated profit and its earning prospects for the coming year. If there are no NPV positive opportunities, i.e. projects where returnsexceed the hurdle rate, then management must return excess cash to investors. These free cash flows comprise cash remaining after all business expenses have been met. This is the general case, however there are exceptions. For example, investors in a "Growth stock", expect that the company will, almost by definition,retain earnings so as to fund growth internally. In other cases, even though anopportunity is currently NPV negative, management may consider investment flexibility / potential payoffs and decide to retain cash flows; see above and Real options. Management must also decide on the form of the dividend distribution, generally as cash dividends or via a share buyback. Various factors may be taken intoconsideration: where shareholders must pay tax on dividends, firms may elect toretain earnings or to perform a stock buyback, in both cases increasing the value of shares outstanding. Alternatively, some companies will pay "dividends" from stock rather than in cash; see Corporate action. Today, it is generally accepted that dividend policy is value neutral (see Modigliani-Miller theorem).

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Working capital managementDecisions relating to working capital and short term financing are referred to as working capital management[14] . These involve managing the relationship betwe

en a firm

s short-term assets and its short-term liabilities. As above, the goalof Corporate Finance is the maximization of firm value. In the context of longterm, capital investment decisions, firm value is enhanced through appropriatelyselecting and funding NPV positive investments. These investments, in turn, have implications in terms of cash flow and cost of capital. The goal of Working capital management is therefore to ensure that the firm is able to operate, and that it has sufficient cash flow to service long term debt, and to satisfy both maturing short-term debt and upcoming operational expenses. In so doing, firm value is enhanced when, and if, the return on capital exceeds the cost of capital; See Economic value added (EVA).

Decision criteria

Working capital is the amount of capital which is readily available to an organization. That is, working capital is the difference between resources in cash orreadily convertible into cash (Current Assets), and cash requirements (Current Liabilities). As a result, the decisions relating to working capital are always current, i.e. short term, decisions. In addition to time horizon, working capitaldecisions differ from capital investment decisions in terms of discounting andprofitability considerations; they are also "reversible" to some extent. (Considerations as to Risk appetite and return targets remain identical, although someconstraints - such as those imposed by loan covenants may be more relevant here). Working capital management decisions are therefore not taken on the same basisas long term decisions, and working capital management applies different criteria in decision making: the main considerations are (1) cash flow / liquidity and(2) profitability / return on capital (of which cash flow is probably the more

important). The most widely used measure of cash flow is the net operating cycle, or cash conversion cycle. This represents the time difference between cash payment for raw materials and cash collection for sales. The cash conversion cycleindicates the firm

s ability to convert its resources into cash. Because this number effectively corresponds to the time that the firm

s cash is tied up in operations and unavailable for other activities, management generally aims at a lownet count. (Another measure is gross operating cycle which is the same as net operating cycle except that it does not take into account the creditors deferral period.) In this context, the most useful measure of profitability is Return on capital (ROC). The result is shown as a percentage, determined by dividing relevant income for the 12 months by capital employed; Return on equity (ROE) shows this result for the firm

s shareholders. As above, firm value is enhanced when, and if, the return on capital, exceeds the cost of capital. ROC measures are therefore useful as a management tool, in that they link short-term policy with long-term decision making.

Management of working capitalGuided by the above criteria, management will use a combination of policies andtechniques for the management of working capital [15] . These policies aim at managing the current assets (generally cash and cash equivalents, inventories anddebtors) and the short term financing, such that cash flows and returns are acceptable. Cash management. Identify the cash balance which allows for the businessto meet day to day expenses, but reduces cash holding costs. Inventory management. Identify the level of inventory which allows for uninterrupted production but reduces the investment in raw materials - and minimizes reordering costs - and

hence increases cash flow; see Supply chain management; Just In Time (JIT); Economic order quantity (EOQ); Economic production quantity (EPQ).

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Corporate finance Debtors management. Identify the appropriate credit policy, i.e. credit terms which will attract customers, such that any impact on cash flowsand the cash conversion cycle will be offset by increased revenue and hence Return on Capital (or vice versa); see Discounts and allowances. Short term financing. Identify the appropriate source of financing, given the cash conversion cycle: the inventory is ideally financed by credit granted by the supplier; however,it may be necessary to utilize a bank loan (or overdraft), or to "convert debto

rs to cash" through "factoring".

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Relationship with other areas in financeInvestment bankingUse of the term corporate finance varies considerably across the world. In the United States it is used, as above, to describe activities, decisions and techniques that deal with many aspects of a companys finances and capital. In the United Kingdom and Commonwealth countries, the terms corporate finance and corporate financier tend to be associated with investment banking - i.e. with transactions in which capital is raised for the corporation.[16] These may include Raising seed, st

art-up, development or expansion capital Mergers, demergers, acquisitions or thesale of private companies Mergers, demergers and takeovers of public companies,including public-to-private deals Management buy-out, buy-in or similar of companies, divisions or subsidiaries - typically backed by private equity Equity issues by companies, including the flotation of companies on a recognised stock exchange in order to raise capital for development and/or to restructure ownership Raising capital via the issue of other forms of equity, debt and related securities for the refinancing and restructuring of businesses Financing joint ventures, project finance, infrastructure finance, public-private partnerships and privatisations Secondary equity issues, whether by means of private placing or further issues on a stock market, especially where linked to one of the transactions listed above. Raising debt and restructuring debt, especially when linked to thetypes of transactions listed above

Financial risk managementRisk management [17] is the process of measuring risk and then developing and implementing strategies to manage that risk. Financial risk management focuses onrisks that can be managed ("hedged") using traded financial instruments (typically changes in commodity prices, interest rates, foreign exchange rates and stockprices). Financial risk management will also play an important role in cash management. This area is related to corporate finance in two ways. Firstly, firm exposure to business and market risk is a direct result of previous Investment andFinancing decisions. Secondly, both disciplines share the goal of enhancing, orpreserving, firm value. All large corporations have risk management teams, andsmall firms practice informal, if not formal, risk management. There is a fundamental debate on the value of "Risk Management" and shareholder value that questions a shareholder

s desire to optimize risk versus taking exposure to pure risk.The debate links value of risk management in a market to the cost of bankruptcyin that market. Derivatives are the instruments most commonly used in financialrisk management. Because unique derivative contracts tend to be costly to create and monitor, the most cost-effective financial risk management methods usuallyinvolve derivatives that trade on well-established financial markets or exchanges. These standard derivative instruments include options, futures contracts, forward contracts, and swaps. More customized and second generation derivatives known as exotics trade over the counter aka OTC.

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Corporate finance See: Financial engineering; Financial risk; Default (finance);Credit risk; Interest rate risk; Liquidity risk; Market risk; Operational risk;Volatility risk; Settlement risk; Value at Risk;.

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Personal and public finance

Corporate finance utilizes tools from almost all areas of finance. Some of the tools developed by and for corporations have broad application to entities otherthan corporations, for example, to partnerships, sole proprietorships, not-for-profit organizations, governments, mutual funds, and personal wealth management.But in other cases their application is very limited outside of the corporate finance arena. Because corporations deal in quantities of money much greater thanindividuals, the analysis has developed into a discipline of its own. It can bedifferentiated from personal finance and public finance.

Related professional qualificationsQualifications related to the field include:[18] Finance qualifications: Degrees: Masters degree in Finance (MSF), Master of Financial Economics Certifications:

Chartered Financial Analyst (CFA), Corporate Finance Qualification (CF), Certified International Investment Analyst (CIIA), Association of Corporate Treasurers(ACT), Certified Market Analyst (CMA/FAD) Dual Designation, Master Financial Manager (MFM), Master of Finance & Control (MFC), Certified Treasury Professional(CTP), Association for Financial Professionals, Certified Merger & Acquisition Advisor (CM&AA) Business qualifications: Degrees: Master of Business Administration (MBA), Master of Management (MM), Master of Science in Management (MSM), Master of Commerce (M Comm), Doctor of Business Administration (DBA) Certification:Certified Business Manager (CBM), Certified MBA (CMBA) Accountancy qualifications: Qualified accountant: Chartered Accountant (ACA, CA), Certified Public Accountant (CPA), Chartered Certified Accountant(ACCA), Chartered Management Accountant (CIMA) Non-statutory qualifications: Chartered Cost Accountant (CCA Designation from AAFM), Certified Management Accountant (CMA)

See also Financial modeling Business organizations Financial planning Investmagerial economics Private equity Real option Venture capital Right-financing Factoring (finance) Global Squeeze

Lists: List of accounting topics

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Corporate finance List of finance topics List of corporate finance topics List of valuation topics

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References[1] See Corporate Finance (http:/ / pages. stern. nyu. edu/ ~adamodar/ New_Home_

Page/ CFin/ CF. htm#ch7), Aswath Damodaran, New York University

s Stern School of Business [2] See Corporate Finance: First Principles (http:/ / pages. stern. nyu. edu/ ~adamodar/ New_Home_Page/ AppldCF/ other/ Image2. gif), Aswath Damodaran, New York University

s Stern School of Business [3] The framework for this section is based on Notes (http:/ / pages. stern. nyu. edu/ ~adamodar/ New_Home_Page/ AppldCF/ other/ Image2. gif) by Aswath Damodaran at New York University

s Stern School of Business [4] See: Investment Decisions and Capital Budgeting (http:/ / www. duke. edu/ ~charvey/ Classes/ ba350_1997/ vcf2/ vcf2. htm), Prof. Campbell R. Harvey; The Investment Decision of the Corporation (http:/ / www. bus. lsu. edu/ academics/ finance/ faculty/ dchance/ Instructional/ FinancialManagementDecisions. ppt#257,2,Slide), Prof. Don M. Chance [5] See: Valuation (http:/ / pages. stern. nyu. edu/ ~adamodar/ New_Home_Page/ lectures/ val. html), Prof. Aswa

th Damodaran; Equity Valuation (http:/ / www. duke. edu/ ~charvey/ Classes/ ba350_1997/ vcf1/ vcf1. htm), Prof. Campbell R. Harvey [6] See for example CampbellR. Harvey

s Hypertextual Finance Glossary (http:/ / biz. yahoo. com/ f/ g/ hh. html) or investopedia.com (http:/ / www. investopedia. com/ terms/ h/ hurdlerate.asp) [7] See: Real Options Analysis and the Assumptions of the NPV Rule (http:// www. realoptions. org/ papers2002/ SchockleyOptionNPV. pdf. ), Tom Arnold & Richard Shockley [8] See: Decision Tree Analysis (http:/ / www. mindtools. com/ pages/ article/ newTED_04. htm), mindtools.com; Decision Tree Primer (http:/ / www. public. asu. edu/ ~kirkwood/ DAStuff/ decisiontrees/ index. html), Prof. Craig W. Kirkwood Arizona State University [9] See: "Capital Budgeting Under Risk".Ch.9 in Schaum

s outline of theory and problems of financial management (http:// books. google. com/ books?id=_lnmxnhoAUEC& printsec=frontcover& dq=related:ISBN0070580316#v=onepage& q& f=false), Jae K. Shim and Joel G. Siegel. [10] See: Id

entifying real options (http:/ / faculty. fuqua. duke. edu/ ~charvey/ Teaching/BA456_2002/ Identifying_real_options. htm), Prof. Campbell R. Harvey; Applications of option pricing theory to equity valuation (http:/ / pages. stern. nyu. edu/ ~adamodar/ New_Home_Page/ lectures/ opt. html), Prof. Aswath Damodaran; How DoYou Assess The Value of A Company

s "Real Options"? (http:/ / www. expectationsinvesting. com/ tutorial11. shtml), Prof. Alfred Rappaport Columbia University &Michael Mauboussin [11] See Probabilistic Approaches: Scenario Analysis, Decision Trees and Simulations (http:/ / www. stern. nyu. edu/ ~adamodar/ pdfiles/ papers/ probabilistic. pdf), Prof. Aswath Damodaran [12] See: The Financing Decision of the Corporation (http:/ / www. bus. lsu. edu/ academics/ finance/ faculty/dchance/ Instructional/ FinancialManagementDecisions. ppt#256,1,Slide), Prof. Don M. Chance; Capital Structure (http:/ / pages. stern. nyu. edu/ ~adamodar/ pdfiles/ ovhds/ capstr. pdf), Prof. Aswath Damodaran [13] See Dividend Policy (http:/ / pages. stern. nyu. edu/ ~adamodar/ pdfiles/ ovhds/ divid. pdf), Prof. AswathDamodaran [14] See Working Capital Management (http:/ / www. studyfinance. com/lessons/ workcap/ index. mv), Studyfinance.com; Working Capital Management (http:/ / www. treasury. govt. nz/ publicsector/ workingcapital/ chap2. asp), treasury.govt.nz [15] See The 20 Principles of Financial Management (http:/ / www. bus. lsu. edu/ academics/ finance/ faculty/ dchance/ Instructional/ PrinciplesofFinancialManagement. htm), Prof. Don M. Chance, Louisiana State University [16] Beaney, Shaun, "Defining corporate finance in the UK" (http:/ / www. icaew. co. uk/index. cfm?route=122299), The Institute of Chartered Accountants, April 2005 [17] See Professional Risk Managers

International Association (http:/ / www. prmia. org/ ) and Global Association of Risk Professionals (http:/ / www. garp. com/) [18] Careers in Corporate Finance (http:/ / www. careers-in-finance. com/ cf.

htm), careers-in-finance.com

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Financial capital

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Financial capitalFinancial capital can refer to money used by entrepreneurs and businesses to buywhat they need to make their products or provide their services or to that sect

or of the economy based on its operation, i.e. retail, corporate, investment banking, etc.

Financial capital vs. real capitalFinancial capital or just capital in finance and accounting, refers to the fundsprovided by lenders (and investors) to businesses to purchase real capital equipment for producing goods/services. Real Capital or Economic Capital comprises physical goods that assist in the production of other goods and services, e.g. shovels for gravediggers, sewing machines for tailors, or machinery and tooling for factories.

Capital exports in 2006

Capital imports in 2006 Financial capital generally refers to saved-up financialwealth, especially that used to start or maintain a business. A financial concept of capital is adopted by most entities in preparing their financial reports.Under a financial concept of capital, such as invested money or invested purchasing power, capital is synonymous with the net assets or equity of the entity. Under a physical concept of capital, such as operating capability, capital is regarded as the productive capacity of the entity based on, for example, units of output per day.[1] Financial capital maintenance can be measured in either nominalmonetary units or units of constant purchasing power. [2] There are thus threeconcepts of capital maintenance in terms of International Financial Reporting Standards (IFRS): (1) Physical capital maintenance (2) Financial capital maintenance in nominal monetary units (3) Financial capital maintenance in units of const

ant purchasing power.[3]

Financial capital is provided by lenders for a price: interest. Also see time value of money for a more detailed description of how financial capital may be analyzed. Furthermore, financial capital, is any liquid medium or mechanism that represents wealth, or other styles of capital. It is, however, usually purchasingpower in the form of money available for the production or purchasing of goods,etcetera. Capital can also be obtained by producing more than what is immediately required and saving the surplus. Financial capital has been subcategorized bysome academics as economic or productive capital necessary for operations, signaling capital which signals a company

s financial strength to shareholders, and regulatory capital which fulfills capital requirements.[4]

Sources of capital Long term - usually above 7 years Share Capital Mortgage loan Retained Profinture Capital Debenture Project Finance

Medium term - usually between 2 and 7 years Term Loans

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Financial capital Leasing Hire Purchase Short term - usually under 2 years BOverdraft Trade Credit Deferred Expenses Factoring

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Capital market Long-term funds are bought and sold: Shares Debentures Long-term loans, often

th a mortgage bond as security Reserve funds Euro Bonds

Money market Financial institutions can use short-term savings to lend out in the form of short-term loans: Credit on open account Bank overdraft Short-term loans Bills of exchange Factoring of debtors

Differences between shares and debentures Shareholders are effectively owners; debenture-holders are creditors. Shareholders may vote at AGMs and be elected as directors; debenture-holders may not voteat AGMs or be elected as directors. Shareholders receive profit in the form of dividends; debenture-holders receive a fixed rate of interest. If there is no pro

fit, the shareholder does not receive a dividend; interest is paid to debenture-holders regardless of whether or not a profit has been made. In case of dissolution of firms debenture holders are paid first as compared to shareholder.

Fixed capitalThis is money which is used to purchase assets that will remain permanently in the business and help it to make a profit.

Factors determining fixed capital requirements Nature of business Size of business Stage of development Capital invested by theowners

location of that area

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Working capitalWorking capital is money which is used to buy stock, pay expenses and finance credit.

Factors determining working capital requirements Size of business Stage of development Time of production Rate of sratio Buying and selling terms Seasonal consumption Seasonal product profit level growth and expansion production cycle general nature of business business cycle

InstrumentsA contract regarding any combination of capital assets is called a financial instrument, and may serve as a medium of exchange, standard of deferred payment, unit of account, or store of value.

Most indigenous forms of money (wampum, shells, tally sticks and such) and the modern fiat money is only a "symbolic" storage of value and not a real storage ofvalue like commodity money.

Capital vs. moneyLiquidity requirements of these vary significantly leading to a diversity of contracts and financial markets to trade them on. When all four functions are served by one instrument, this is called money, which does not need to be traded on financial markets since the risk of loss of value of money is uniform across thewhole society. Where no one form of money is agreed to have reliable value, andbarter is undesirable, less liquid or more diverse instruments have served the four functions. This article focuses mostly on financial instruments which are not uniformly affected by native currency inflation and which are not guaranteed b

y a state.

Own and borrowed capitalCapital contributed by the owner or entrepreneur of a business, and obtained, for example, by means of savings or inheritance, is known as own capital or equity, whereas that which is granted by another person or institution is called borrowed capital, and this must usually be paid back with interest. The ratio betweendebt and equity is named leverage. It has to be optimized as a high leverage can bring a higher profit but create solvency risk.

Borrowed capitalThis is capital which the business borrows from institutions or people, and includes debentures: Redeemable debentures Irredeemable debentures

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Own capitalThis is capital that owners of a business (shareholders and partners, for example) provide: Preference shares/hybrid source of finance Ordinary preference share

s Cumulative preference shares Participating preference shares Ordinary shares Bonus shares Founders

shares These have preference over the equity shares. Thismeans the payments made to the shareholders are first paid to the preference shareholder(s) and then to the equity shareholders.

Issuing and tradingLike money, financial instruments may be "backed" by state military fiat, credit(i.e. social capital held by banks and their depositors), or commodity resources. Governments generally closely control the supply of it and usually require some "reserve" be held by institutions granting credit. Trading between various national currency instruments is conducted on a money market. Such trading revealsdifferences in probability of debt collection or store of value function of tha

t currency, as assigned by traders. When in forms other than money, financial capital may be traded on bond markets or reinsurance markets with varying degreesof trust in the social capital (not just credits) of bond-issuers, insurers, andothers who issue and trade in financial instruments. When payment is deferred on any such instrument, typically an interest rate is higher than the standard interest rates paid by banks, or charged by the central bank on its money. Often such instruments are called fixed-income instruments if they have reliable payment schedules associated with the uniform rate of interest. A variable-rate instrument, such as many consumer mortgages, will reflect the standard rate for deferred payment set by the central bank prime rate, increasing it by some fixed percentage. Other instruments, such as citizen entitlements, e.g. "U.S. Social Security", or other pensions, may be indexed to the rate of inflation, to provide a reliable value stream. Trading in stock markets or commodity markets is actually t

rade in underlying assets which are not wholly financial in themselves, althoughthey often move up and down in value in direct response to the trading in morepurely financial derivatives. Typically commodity markets depend on politics that affect international trade, e.g. boycotts and embargoes, or factors that influence natural capital, e.g. weather that affects food crops. Meanwhile, stock markets are more influenced by trust in corporate leaders, i.e. individual capital,by consumers, i.e. social capital or "brand capital" (in some analyses), and internal organizational efficiency, i.e. instructional capital and infrastructuralcapital. Some enterprises issue instruments to specifically track one limited division or brand. "Financial futures", "Short selling" and "financial options" apply to these markets, and are typically pure financial bets on outcomes, ratherthan being a direct representation of any underlying asset.

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Broadening the notionThe relationship between financial capital, money, and all other styles of capital, especially human capital or labor, is assumed in central bank policy and reg

ulations regarding instruments as above. Such relationships and policies are characterized by a political economy - feudalist, socialist, capitalist, green, anarchist or otherwise. In effect, the means of money supply and other regulationson financial capital represent the economic sense of the value system of the society itself, as they determine the allocation of labor in that society. So, forinstance, rules for increasing or reducing the money supply based on perceived inflation, or on measuring well-being, reflect some such values, reflect the importance of using (all forms of) financial capital as a stable store of value. Ifthis is very important, inflation control is key - any amount of money inflationreduces the value of financial capital with respect to all other types. If, however, the medium of exchange function is more critical, new money may be more freely issued regardless of impact on either inflation or well-being.

Marxian perspectivesIt is common in Marxist theory to refer to the role of "Finance Capital" as thedetermining and ruling class interest in capitalist society, particularly in thelatter stages.[5] [6]

ValuationNormally, a financial instrument is priced accordingly to the perception by capital market players of its expected return and risk. Unit of account functions may come into question if valuations of complex financial instruments vary drastically based on timing. The "book value", "mark-to-market" and "mark-to-future"[7]conventions are three different approaches to reconciling financial capital value units of account.

Economic roleSocialism, capitalism, feudalism, anarchism, other civic theories take markedlydifferent views of the role of financial capital in social life, and propose various political restrictions to deal with that. Finance capitalism is the production of profit from the manipulation of financial capital. It is held in contrastto industrial capitalism, where profit is made from the manufacture of goods.

See also banking capital capital market Capitalism finance financialization Finmons Five Capitals funding money supply

list of finance topics list of accounting topics spiritual capital

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Notes[1] (http:/ / www. aasb. com. au/ admin/ file/ content105/ c9/ Framework_07-04nd. pdf) Framework for the Preparation and Presentation of Financial Statements, P

ar 102 [2] (http:/ / www. aasb. com. au/ admin/ file/ content105/ c9/ Framework_07-04nd. pdf) Framework for the Preparation and Presentation of Financial Statements, Par 104 [3] (http:/ / www. aasb. com. au/ admin/ file/ content105/ c9/ Framework_07-04nd. pdf) Framework for the Preparation and Presentation of FinancialStatements, Par 104 [4] The Risk Report, April 2009. Volume XXXI No. 8. IRMI (http:/ / www. irmi. com/ ). [5] Imperialism, the Highest Stage of Capitalism ibid. Finance Capital and the Finance Oligarchy (http:/ / www. marxists. org/ archive/ lenin/ works/ 1916/ imp-hsc/ ch03. htm) [6] Monopoly-Finance Capital and theParadox of Accumulation John Bellamy Foster and Robert W. McChesney [[Monthly Review (http:/ / www. monthlyreview. org/ 091001foster-mcchesney. php)] Sept-Oct 2009] [7] The New Generation of Risk Management for Hedge Funds and Private Equity Investments (http:/ / books. google. com/ books?id=2w0bRIv7cygC& pg=PA349& lpg

=PA349& dq="mark-to-future"& source=bl& ots=-wAo4Ibldg& sig=a8u9-GRjc2ng_8ltgiKnus_cURk& hl=en& ei=l0YSSs_oEpLhtgea6oCSBA& sa=X& oi=book_result& ct=result& resnum=5#PPP1,M1), edited by Lars Jaeger, p. 349

ReferencesF. Boldizzoni, Means and Ends: The Idea of Capital in the West, 1500-1970, New York: Palgrave Macmillan, 2008, chapters 7-8

Cornering the marketIn finance, to corner the market is to purchase enough of a particular stock, commodity, or other asset to allow the price to be manipulated, by analogy to thegeneral business jargon where a company described as having "cornered the market" has a very high market share. The cornerer hopes to gain control of enough of

the supply of the commodity to be able to set the price for it. This can be donethrough several mechanisms. The most direct strategy is to simply buy up a large percentage of the available commodity offered for sale in some spot market andhoard it. With the advent of futures trading, a cornerer may buy a large numberof futures contracts on a commodity and then sell them at a profit after inflating the price. Although there have been many attempts to corner markets in everything from tin to cattle, to date very few of these attempts have ever succeeded; instead, most of these attempted corners have tended to break themselves spontaneously. Indeed, as long ago as 1923, Edwin Lefvre wrote, "very few of the greatcorners were profitable to the engineers of them."[1] A cornerer can become vulnerable due to the size of the position, especially if the attempt becomes widely known. If the rest of the market senses weakness, it may resist any attempt toartificially drive the market any further by actively taking opposing positions. If the price starts to move against the cornerer, any attempt by the cornererto sell would likely cause the price to drop substantially. In such a situation,many other parties could profit from the cornerer's need to unwind the position.

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Historical examples1800s: Classic examples by Edwin LefvreJournalist Edwin Lefvre lists several examples of corners from the mid-1800s. He

distinguishes corners as the result of manipulations from corners as the resultof competitive buying. Cornelius Vanderbilt and the Harlem Railroad One of the few cornerers whose rationale was published and justified, Vanderbilt started accumulating shares of the Harlem Railroad in 1862 because he anticipated its strategic value. He took control of the Harlem Railroad and later explained that he wanted to show that he could take this railroad, which was generally considered worthless, and make it valuable. The corner of June 25 1863 can be seen as just an episode in a strategic investment that served the public well. James Fisk, JayGould and the Black Friday (1869) A financial panic in the United States causedby two speculators efforts to corner the gold market on the New York Gold Exchange. It was one of several scandals that rocked the presidency of Ulysses S. Grant. When the government gold hit the market, the premium plummeted within minutes

and many Investors were ruined. Fisk and Gould escaped significant financial harm. Lefvre thoughts on corners of the old days In chapter 19 of his book, Edwin Lefvre tries to summarize the rationale for the corners of the 19th century.

A wise old broker told me that all the big operators of the 60s and 70s had oneambition, and that was to work a corner. In many cases this was the offspring ofvanity; in others, of the desire for revenge. [..] It was more than the prospective money profit that prompted the engineers of corners to do their damnedest.It was the vanity complex asserting itself among cold-bloodest operators.

1900s: The Northern Pacific RailwayThis corner on May 9, 1901, is a well documented case of competitive buying,