What is Finance? Meaning and How The Financial Market Works

4 min read

What is finance? We are in front of a very broad subject, which includes specific mechanisms and skills. It is not impossible, however, to understand what finance is and how it works?

Of course, it is not easy to operate on the financial markets, but to understand what finance is possible and this guide will dissolve all doubts.

In many, you have probably wondered what finance is, especially to understand what is really behind the functioning of finance and the markets of which the news and the newspapers speak.

We will try to explain what it is, what Finance deals with and how some of the main actors in finance work: the financial markets.

Here is a quick and practical guide to understanding what finance is, what the meaning of the term is, what it means and how financial markets work.


What is finance?

Finance is an economic discipline that deals with studying the processes and the choices of investment and financing. An investment is the financial activity of an economic entity (investor) aimed at increasing capital and creating or acquiring new resources to be used in the production process to obtain a profit.

The financing, on the other hand, consists in the transfer of a sum of money with the constraint of a return of a capital of the same value or greater value.

What, however, studies finance is the aspect related to the technical sphere of these processes, that is, to that area that concerns pricing, hedging and valuations.

The term hedging, in particular, means all those strategies that serve to protect a particular investment from the risks that may derive from unforeseen events of various kinds, such as the fluctuation of currencies or prices.

The evaluations, on the other hand, relate to the analysis of investments, i.e. economic and financial planning activities whose purpose is to verify the impact in terms of profitability of a given investment project on an economic entity.

The interest of finance is above all for financial instruments and for the markets in which they are traded (financial markets, in fact).

Financial instruments are a particular category of financial products considered as means of investment and through which exchanges of cash flows take place between individuals, companies and States.

As we have already said, however, finance is also interested in the financial markets, the places where these exchanges of flows take place.

But how does a financial market work? The answer is simpler than you might think. Let’s see it together.

How the financial market works?

The financial market, as we have said, is where the exchange of financial instruments takes place.

Each financial market has precise rules on how to admit financial instruments and operators.

Furthermore, it is characterized by a supervisory activity that is normally carried out by the company that organizes the market, assisted by a supervisory authority to which the former reports any irregularities.

Every financial market has a structure that constitutes its organizational frame.

Wanting to simplify, we can imagine a financial market as a real market where, however, goods and coins disappear to become virtual.

In the past there was a stock exchange (and therefore a financial market) for each category of goods or products. As the economy progressed, it was decided to collect all these markets in a single market in which, however, material goods are no longer present, but the possibility of buying them in a broader sense remains.

In particular, depending on the nature of the financial instruments traded, it is possible to distinguish between different types of financial markets. For example, in the case of the sale of shares (a share of a company listed on a stock exchange, then a joint-stock company), it is called the stock exchange, while the currency market is called Forex and the bond market is the bond market.

In financial markets, therefore, the meeting between investors and economic subjects who need resources is taking place. To act as mediators between the two parties, ensuring a correct and serious relationship and protecting transactions, there are financial intermediaries, who are responsible for informing investors about the subjects they are about to allocate their resources to.

You May Also Like

More From Author