Types of Finance…

1. Public finance

The federal government helps prevent market failures by allocating resources, distributing income, and overseeing the stability of the economy. Regular funding for these programs is mostly secured through taxation. Tax Policy Center. “What are the sources of revenue for the federal government?”

Borrowings from banks, insurance companies, and other governments and dividend earnings from its companies also help finance the federal government.

State and local governments also receive grants and aid from the federal government. Other sources of public finance include user charges for ports, airport services and other facilities; Penalty resulting from breach of law; income from licenses and fees, such as for driving; and sale of government securities and bond issues.

2. Corporate Finance

Businesses obtain financing through a variety of means, from equity investments to credit arrangements. A firm can take a loan from a bank or arrange a line of credit. Acquiring and managing debt properly can help a company expand and become more profitable.

Startups can receive capital from angel investors or venture capitalists in exchange for a percentage of ownership. If a company thrives and goes public, it will issue shares on the stock exchange; Such initial public offerings (IPOs) bring in huge cash flow to the firm. Established companies can sell additional shares or issue corporate bonds to raise money. Businesses can buy dividend-paying stocks, blue-chip bonds, or interest-bearing bank certificates of deposit (CDs); They may also buy other companies in an attempt to increase revenue.

Recent examples of corporate lending include:

  • Bausch & Lomb Corp’s initial public offering began on Jan. 13, 2022 and shares were officially sold in May 2022. The healthcare company generated $630 million in revenue.
  • Ford Motor Credit Company LLC manages notes outstanding to raise capital or extinguish debt to support Ford Motor Company.
  • Homelight, a real estate company, used a mixed financing approach to raise $115 million ($60 million by issuing additional equity and $55 million by debt financing). Homelite used the additional capital to acquire lending start-up Accept.inc.

3. Personal Finance

Personal financial planning usually involves analyzing an individual’s or family’s current financial situation, estimating short-term and long-term needs, and implementing a plan to meet those needs within personal financial constraints. Personal finance largely depends on a person’s earnings, life needs, and personal goals and desires.

Personal finance matters include but are not limited to: securing financial products such as credit cards; life and home insurance; mortgage; and retirement products. Personal banking (such as checking and savings accounts, Individual Retirement Accounts (IRAs), and 401(k) plans) is also considered part of personal finance.

The most important aspects of personal finance include:

  • Assessment of current financial position (expected cash flow, current savings and so on)
  • Buying insurance to protect against risk and ensure that one’s material position is secure
  • Tax calculation and filing
  • Determining savings and investments
  • Planning for retirement

As a specialized field, personal finance is a recent development, although forms of it have been taught in universities and schools as “home economics” or “consumer economics” since the early 20th century. The field was initially neglected by male economists, as “home economics” was seen as the domain of housewives. Recently, economists have repeatedly emphasized broad education in matters of personal finance as an integral part of the macro performance of the overall national economy.

4. Social finance

Social finance generally refers to investments made in social enterprises, including charities and some cooperatives. Rather than outright donations, these investments take the form of equity or debt financing, with the investor seeking both financial reward as well as social benefit.

Modern forms of social finance also include some segments of microfinance, particularly loans to small business owners and entrepreneurs in less developed countries to help them grow their enterprises. Lenders get a return on their loans while helping to improve the living standards of individuals and benefiting the local society and economy.

Social impact bonds (also known as pay for success bonds or social benefit bonds) are a specific type of instrument that acts as a contract with the public sector or local government. Repayment and return on investment are dependent on the achievement of certain social outcomes and achievements.

5. Behavioral Finance

There was a time when theoretical and empirical evidence suggested that traditional financial theories were reasonably successful in predicting and explaining certain types of economic phenomena. However, over time, scholars in the financial and economic fields discovered anomalies and behaviors that occurred in the real world but could not be explained by any available theories.

It became increasingly clear that conventional theories could explain certain “ideal” phenomena—but the real world was, in fact, more chaotic and chaotic, and that market participants often behaved in ways that were irrational and therefore difficult to predict. is For those models.

As a result, academics turned to cognitive psychology to account for rational and illogical behaviors through modern financial theory. Behavioral science is a field born out of these efforts; It seeks to explain our actions, while the modern finance ideal seeks to explain the actions of “economic man” (Homo economicus).

Behavioral finance, a sub-field of behavioral economics, proposes psychology-based theories to explain financial anomalies, such as sharp rises or falls in stock prices. It aims to identify and understand why people make certain financial choices. Within behavioral finance, it is believed that the information structure and characteristics of market participants systematically influence individuals’ investment decisions as well as market outcomes.

Daniel Kahneman and Amos Tversky, who began collaborating in the late 1960s, are considered by many to be the fathers of behavioral finance. He was later joined by Richard Thaler, who combined elements of economics and finance with elements of psychology to develop concepts such as mental accounting, the endowment effect, and other biases that affect people’s behavior.

Principles of Behavioral Finance

Behavioral finance encompasses many concepts, but there are four main ones: mental accounting, herd behavior, anchoring and high self-ratings, and overconfidence.

Mental accounting refers to people’s tendency to allocate money for specific purposes based on a variety of subjective criteria, including the source of the money and the intended use for each account. The theory of mental accounting suggests that individuals may assign different functions to each asset group or account, which can result in a set of irrational, even harmful, behaviors. For example, some people set aside a special “money jar” for a vacation or a new home while at the same time carrying significant credit card debt.

Herd behavior states that people copy the financial behaviors of the majority or herd, whether those actions are rational or irrational. In many cases, herd behavior is a set of decisions and actions that the individual does not necessarily make themselves, but which seem to have legitimacy because “everyone else is doing it.” Herd behavior is often considered a major cause of financial panics and stock market crashes.

Anchoring refers to tying costs to a specific reference point or level, even if it has no logical relevance to the decision at hand. A common example of “anchoring” is the conventional wisdom that a diamond engagement ring should be worth about two months’ salary. Another might be buying a stock that briefly rose from trading around $65 to $80 and then back down to $65, meaning it’s now a bargain (anchoring your strategy at that $80 price). While that may be true, it is more likely that the $80 figure was an anomaly, and that $65 is the true value of the stock.

High self-rating refers to a person’s tendency to rank themselves as better than others or higher than the average person. For example, an investor may think he is an investment guru when his investments outperform, blocking poorly performing investments. High self-ratings go hand in hand with overconfidence, which reflects the tendency to overestimate or exaggerate one’s ability to perform a given task successfully. Overconfidence can be detrimental to an investor’s ability to pick stocks, for example. A 1998 study by researcher Terence Odion found that overconfident investors typically make more trades than their less confident counterparts, and that these trades actually yield significantly less than the market.

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