Smartbook – chapter 1 – Introduction
1.1 Finance: A Quick Look
Before we plunge into our study of “corp. fin.,” we think a quick overview of the finance field might be a good idea. Our
goal is to clue you in on some of the most important areas in finance and some of the career opportunities available in
each. We also want to illustrate some of the ways finance fits in with other areas such as marketing, management, and
accounting.
The Four Basic Areas
Traditionally, financial topics are grouped into four main areas:
1. Corporate finance
2. Investments
3. Financial institutions
4. International finance
We discuss each of these next. For job descriptions in finance and other areas, visit www.careers-in-business.com.
Corporate Finance
The first of these four areas, corporate finance, is the main subject of this book. We begin covering this subject in our
next section, so we will wait until then to get into any details. One thing we should note is that the term corporate
finance seems to imply that what we cover is only relevant to corporations, but the truth is that almost all of the topics
we consider are much broader than that. Maybe business finance would be a little more descriptive, but even this is too
narrow because at least half of the subjects we discuss in the pages ahead are really basic financial ideas and principles
applicable across all the various areas of finance and beyond.
Investments
Broadly speaking, the investments area deals with financial assets such as stocks and bonds. Some of the more important
questions include:
1. What determines the price of a financial asset, such as a share of stock?
2. What are the potential risks and rewards associated with investing in financial assets?
3. What is the best mixture of financial assets to hold?
Students who specialize in the investments area have various career opportunities. Being a stockbroker is one of the
most common. Stockbrokers often work for large companies such as Merrill Lynch, advising customers on what types of
investments to consider and helping them make buy and sell decisions. Financial advisers play a similar role but are not
necessarily brokers.
Portfolio management is a second investments-related career path. Portfolio managers, as the name suggests, manage
money for investors. For example, individual investors frequently buy into mutual funds. Such funds are a means of
pooling money that is then invested by a portfolio manager. Portfolio managers also invest and manage money for
pension funds, insurance companies, and many other types of institutions.
Security analysis is a third area. A security analyst researches individual investments, such as stock in a particular
company, and makes a determination as to whether the price is right. To do so, an analyst delves deeply into company
and industry reports, along with a variety of other information sources. Frequently, brokers and portfolio managers rely
on security analysts for information and recommendations.
These investments-related areas, like many areas in finance, share an interesting feature. If they are done well, they can
be very rewarding financially (translation: You can make a lot of money). The bad news, of course, is that they can be
very demanding and very competitive, so they are definitely not for everybody.
, Financial Institutions
Financial institutions are basically businesses that deal primarily in financial matters. Banks and insurance companies
would probably be the most familiar to you. Institutions such as these employ people to perform a wide variety of
finance-related tasks. For example, a commercial loan officer at a bank would evaluate whether a particular business has
a strong enough financial position to warrant extending a loan. At an insurance company, an analyst would decide
whether a particular risk was suitable for insuring and what the premium should be.
International Finance
International finance isn’t so much an area as it is a specialization within one of the main areas we described earlier. In
other words, careers in international finance generally involve international aspects of either corporate finance,
investments, or financial institutions. For example, some portfolio managers and security analysts specialize in non-U.S.
companies. Similarly, many U.S. businesses have extensive overseas operations and need employees familiar with such
international topics as exchange rates and political risk. Banks frequently are asked to make loans across country lines,
so international specialists are needed there as well.
Why Study Finance?
Who needs to know finance? In a word, you. In fact, there are many reasons you need a working knowledge of finance
even if you are not planning a finance career. We explore some of these reasons next.
Marketing and Finance
If you are interested in marketing, you need to know finance because, for example, marketers constantly work with
budgets, and they need to understand how to get the greatest payoff from marketing expenditures and programs.
Analyzing costs and benefits of projects of all types is one of the most important aspects of finance, so the tools you
learn in finance are vital in marketing research, the design of marketing and distribution channels, and product pricing,
to name a few areas.
Financial analysts rely heavily on marketing analysts, and the two frequently work together to evaluate the profitability
of proposed projects and products. As we will see in a later chapter, sales projections are a key input in almost every
type of new product analysis, and such projections are often developed jointly between marketing and finance.
Beyond this, the finance industry employs marketers to help sell financial products such as bank accounts, insurance
policies, and mutual funds. Financial services marketing is one of the most rapidly growing types of marketing, and
successful financial services marketers are very well compensated. To work in this area, you obviously need to
understand financial products.
Accounting and Finance
For accountants, finance is required reading. In smaller businesses in particular, accountants often are required to make
financial decisions as well as perform traditional accounting duties. Further, as the financial world continues to grow
more complex, accountants have to know finance to understand the implications of many of the newer types of financial
contracts and the impact they have on financial statements. Beyond this, cost accounting and business finance are
particularly closely related, sharing many of the same subjects and concerns.
Financial analysts make extensive use of accounting information; they are some of the most important end users.
Understanding finance helps accountants recognize what types of information are particularly valuable and, more
generally, how accounting information is actually used (and abused) in practice.
Management and Finance
One of the most important areas in management is strategy. Thinking about business strategy without simultaneously
thinking about financial strategy is an excellent recipe for disaster, and, as a result, management strategists must have a
very clear understanding of the financial implications of business plans.
In broader terms, management employees of all types are expected to have a strong understanding of how their jobs
affect profitability, and they also are expected to be able to work within their areas to improve profitability. This is
precisely what studying finance teaches you: What are the characteristics of activities that create value?
