Interested in finance? Considering taking up to study finance, or just curious what finance is all about? Do you need to understand what finance is, but don't seem to have the time?
This guide is designed to be read quickly, is skim-able, and will give you a just-enough information on the subject of finance: what is it about, how is it relevant, and most importantly, is it worthwhile for you to learn it.
what finance is... and isn't
Contrary to some beliefs: Finance is not a study of how to make money.
the science and art of managing money against some uncertainty to fulfill certain objectives.
Finance is the HOW (the skill) of putting WHAT resources WHEN it is needed.
It doesn't ask why or who.
1. A company faces two options, to buy a new production machine, or to use the same money to publish newspaper ads. The skills of finance will enable you to predict which one is the better option.
2. You need a significant sum of money for a child's tuition in 10 years or so. Good financial skills will enable you to procure those sums cheaper, faster, and, if luck is on your side, with a spare change to boot.
3. Your country's economy is slowing down. The prime minister asks you whether or not to lower interest rates, and what other steps should be taken. With a solid financial know-how, you can confidently tell PM the answer. ("it's complicated, sir.")
the three categories of finance
There are 3 broad categories of finance:
1. Corporate Finance - deals with the management of company's resources. (example 1 above)
2. Personal Finance - deals with the management of your own money and resources. (example 2 above)
3. Public Finance - deals with the doings of the government to manage the country's economy. (example 3 above)
An undergraduate Finance course will generally familiarize you with the basics of each category. Later, you can choose which category(-ies) to pursue further.
"Know what you own, and know why you own it." - Peter Lynch
Because finance runs the world.
From credit cards to banking to stocks to mortgages and insurance, the financial profession and its products are responsible for keeping the material world running smoothly.
Even a slight understanding in finance will help you to navigate life with far greater ease.
How important is finance? Well, without finance we'll be back to hunting for our food, or even worse. Why?
...it's actually a very ancient skill
The field that we'll eventually call finance begins from the very moment one person realized that goods and services have value and can be exchanged with something else... thousands and thousands of years ago.
It has been a part of human life ever since.
1. Is finance hard?
Yes, it is. But no harder than, say, civil engineering or microbiology, and certainly it's not rocket science!
2. What is the difference between FINANCE and ECONOMICS?
Economics is the study of how the economy works: how goods and service and money move and what causes it. Finance attempts to use that knowledge to achieve gains or avoiding losses. Finance is a sub-field of economics; to be good in finance, you must know economics well.
Economics is knowing the kitchen, finance is learning how to cook.
3. What is the difference between FINANCE and ACCOUNTING?
Accounting is the capturing and presenting of business data into an accurate, credible, and standard reports. Finance uses these well-prepared data to make decisions.
aptitude: are you suited for finance?
ARE YOU INTERESTED IN MONEY?
Not in "do you want to be rich" sense but rather "do you want to know your money better" sense. Learning finance will give you knowledge on how to control money, what you can and can't do with it, how to make it work, how not to lose it. You will know your money like an architect knows his/her building or a painter his/her drawing.
If you have any passing interest in your money, learning finance may be worth your while.
More often than not, the skills of finance rely on:
Writing & presenting
To excel in finance, you must be comfortable with both numbers and business.
what you'll actually be studying
Below are some questions that you'll be seeing in a finance course.
1. Your local bank gives you an annual interest of 10% for your money. One day, your best friend offers to sell you a rare painting. He guarantees that you can sell this painting for $10,000 in next year's art fair. How much, at most, should you be willing to pay for this painting?
2. The bank offers you two choices for a loan: i) a fixed 2-year interest at 9.25%, or ii) a floating rate of 5% on top of the federal bank's interest rate. The federal bank's interest rate is 4.5%, and you think it has an equal chance of staying the same or falling by 1% this year. Which option do you take?
answer: the floating rate
3. On June 06 of a particular year, an Indonesian rice dealer decided to import 1,000,000 packets of Japanese rice. Each packet costs 400 JPY. The dealer would like to hedge against a fluctuation in IDR/JPY exchange rate. The forward rate was 125 IDR per 1 JPY. Determine the outcome of the hedge if it was closed on August 03, when the spot rate was 130 IDR.
In the US, the National Assocation of Colleges and Employers reported a starting salary of $55,400 for finance majors (2014 data).
Like most professions, the finance field also has its own tests and certifications. Below are some of the most popular:
Chartered Financial Analyst
Certified Financial Planner
Certified Public Accountant
Certified Fund Specialist
Chartered Financial Consultant
Chartered Market Technician
the cfa exam
The Chartered Financial Analyst® exam administered by the CFA Institute is the toughest, meanest, and the most stringent certification exam available in the world of professional finance. It is widely considered to be the gold standard in the profession. It is divided into 3 levels, and at the highest level it is comparable to an MBA degree.
Try finding some information about the certification to see if it is something you might enjoy aspiring to.
finance in popular culture
Much of the media portrays those in the field of finance as guys in tie and three-piece suits, acting like tough bankers or cunning businessmen overflowing with money and pride.
Like this guy:
While exaggerated, this is not so far off the truth: it's indeed is one of the best dressed profession around, and the amount of money it controls is staggering.
But more often, the finance guys you'll be seeing most are your bankers, insurance agents, auditors, or perhaps that reporter who's talking about the stock market every evening.
Depending on how you look, finance can be an exciting, glamorous, but risky, adventure. Or it can be a stable, calculating, detail-oriented, and financially rewarding profession, albeit a little boring. There's something for everyone's tastes here!
danger zone: high level finance
At its highest levels, finance transcends its boundaries as a field of study and becomes pure, raw economic power. Some examples:
1. A man once topled a country's economy by betting against its currency. His name is George Soros, and is widely known as "The Man Who Broke the Bank of England."
2. Trading firms nowadays have computers so fast, and control so many assets, that "flash crashes" can occur. On May 6, 2010, the US stock markets lost over $1 trillion in a matter of minutes!
3. The American financier, John Pierpont "J.P." Morgan, holds significant influence over the finance of the whole country, and United States Congress members.
4. The discovery of America: made possible because of Isabel I of Castile, the financier behind Christopher Columbus.
If you want to know more about finance, the list below is a good place to start looking.
* Books by Michael Lewis. He is an author and financial journalist who wrote classics like Liar's Poker and The Big Short.
* Money Changes Everything: How Finance Made Civilization Possible. A sprawling work examining the history of finance, and argues that finance is the very foundation of civilization.
* The Freakonomics Series. Examines how economic forces really works in real life. Topics include Santa Claus, sumo wrestling, and drug dealing. Not a finance book per se, but still a fun read.
* The Richest Man in Babylon. A lesson in personal wealth management in form of interconnected parables set in ancient Babylon.
* The Intelligent Investor. Some consider it to be the bible of value investing, and the book that kick-started the legendary investor Warren Buffet on his track to the top.
* The Wolf of Wall Street
* The Big Short
* Margin Call
That's it for this guide, hope you learn something from this! This guide is updated periodically, so check back once in a while to see if there's anything new. Alternatively, you can download the PDF version of this guide here.
All the best.
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