The importance of corporate finance
The study of corporate finance is the study of the financial markets and their interaction with business. (An example of a financial market is a stock exchange.)
The study of corporate finance is the study of the conflicts and tensions that arise from matching the needs of those who want to invest their excess of wealth and those who need wealth to produce goods and services. Financial markets facilitate the matching process.
The for-profit sector, the public sector and the not-for-profit sector use the financial markets to find suitable sources of finance. The financial markets help them to do this by providing:
- a large pool of buyers and sellers.
Financial markets make the financial transactions described below possible.
The for-profit sector
As a business grows, its financing needs increase. The original owner, or entrepreneur, will need to find additional sources of finance.
Investors lending money to businesses need a mechanism that allows them to limit possible financial losses. Investors want to be able to turn their investment back into cash at some point.
The public sector
Governments fund public services and aim to fund these services through taxation receipts. Governments can borrow from investors, who have surplus savings, to plug any shortfall in funding. Like investors, when governments have a surplus of funds, they will want to invest.
The not-for-profit sector
Organisations, such as charities, require funding and will use a combination of voluntary receipts and funding from investors. Investors will require a monetary return, as well as reassurance that their investment will be repaid.