Talk:Principles of Finance
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Why not use the Time value of money page from wikipedia? Any thoughts? It is very thorough. Added to the first paragraph because there is more to the time value of money than inflation. Robbimj 03:54, 25 November 2006 (UTC)
"Just what is finance? The ins and outs of it can be debated, scrutinized, revised, and trivialized ad nauseum."
Removed, because this is obvious. It does nothing to elaborate.
"But at its heart, finance is nothing more than the activity of matching those who have money to those who need or want it without having to earn it first."
This is pratical application of finance. The phrase "nothing more" is odd.
"The means are inumerable but all to the same end: personal gain by granting the use of one's money to another."
This is wrong. Governments, non-profits, NGOs engage in financial sphere activity as well. Not all financial activities result in personal gain.
"It is not actually requisite that money be the medium of finance. Laws very commonly permit the contribution of anything having some value as business investment, be it equipment, property, service, and so on."
Money is BY DEFINITION a medium of exchange. Investments and finance are related, but are not the same.
"The Time Value of Money is one of three fundamental ideas that shape finance. The primary problem behind the Time Value of Money is that of inflation. When asked would you rather have $10 today or $10 next year, people would prefer to receive $10 right now instead of receiving $10 in the future, simply because the buying power that $10 affords a person today will be diminished by rising prices next year."
This is nonsensical. The idea of Time Value of Money has been around during the time Gold was used as currency, when inflation was much less of an issue. The Time Value of Money has to do with the rate of real return. Inflation is one aspect needed to be considered, but it is not the reason for the developement of the theory. The first sentence is correct. The rest is close to junk. ie; does Time Value of Money not work during the Great Depression? Have they forgotten it in Japan?
"Fundamental to all economic activity is rationality and self interest. People who are acting rationally act out of self-interest. The difficulty in finance is that there is no apparent connection between simply allowing another person access to your money and anything that will benefit you personally for doing so."
The last line makes no sense just from reading it. A fundemental ASSUMPTION of some theories of economics is the rational individual; but this is a heavily debated topic within the field of economics.
"Third is the idea of risk. If one gives up control of one's money to another, there exists the possibility that one will never see it again. In addition there is also the possibility that in attempt to serve another person, if that person is injured or somehow feels misled, one may find himself the target of a lawsuit."
This is NOT the most common risk. Even if one "keeps" the money, there exists a chance of loss. The lawsuit risks are not peculiar to finance and has nothing to do with finance per se. We arent talking about financial fraud or negligence here. Risk is MUCH broader and more complex than this.
"What motive, then, does one have not to spend all of one's money as soon as he receives it? The main motive is to increase one's future buying power beyond what one's own capabilities permit."
This is accurate, but only for PERSONAL finance. Also - what does "one's own capabilities" mean? If one can buy stock and the stock appreciates - does that not constitute "capability"? If not, then does this mean that since I do not know how to farm I am incapable of feeding myself?
"every financing activity for every venture falls into the category of either debt financing or equity financing."
This is true of modern financial practice. The words "every" is FAR too general - the reference to large business is mistaken (small businesses use it as well as governments, individuals and non-profits).
"Each category has slightly different balance of characteristics."
This does nothing to explain WHAT those differences are. Differences between debt financing, and even within debt financing, is a huge field of study.
"Higher return, of course, is a direct result of higher risk."
This is financial theory. The concept of risk vs. return needs to be explored further if you're going to make a statement like this.
Debt financing is the more strightforward of the two categories. In this mode money is borrowed for a business venture. The transaction has one borrower or debtor, and at least one lender or creditor. Forms of debt financing can include credit cards, mortgages, signature loans, bonds, IOUs, and HELOCs (Home Equity Lines of Credit) as examples.
The word "straightforward" implies a level of clarity on this issue that isnt there. There are many forms of debt financing. As for "business venture," governments are one of the major consumers of credit.
"With debt financing, the creditor's return is fixed and understandable. "
If by understandable you mean easier to predict than equity, I would agree. But the "real" return is potentially very mystifying. Dont know what to replace it with, but this isnt the best.
"Equity financing is where the far greater risk lies with the far greater return. The sky is the limit with both."
Maybe, before the advent of the Joint Stock Corporation. But - since that financial innovation (a topic that MUST be discussed in this "book") the risks have been limited to investments made. Personal liability was stripped out. Also - the "sky" is a very real place, the limit is, at it's extreme, the production possiblities frontier of the economy. This is what prevents housing bubbles (most recently) or internet stock bubbles (just a few years ago) from becoming the only things in the economy; real, physical reality tends to intervene.
"The return of equity financing is the claim on a business's profits. As long as the business is profitable your investment will provide a return indefinitely."
It's not just "profits" - it's ALL FUTURE POTENTIAL PROFITS that gives companies much of their value. This is why the "time value of money" concept is so important. A stock can be seen as all future potential profits of a company compressed into today and expressed in a price at a given exchange at a given time.
"Only the equity investor may decide when to withdraw his investment and thus relinquish his claim."
Take a look at revolutionary Russia, or Jews in Germany, or the too common notion of bankruptcy. This is decidedly NOT true.
"i.e. because most personal finance does not involve the debtor making a profit,"
This ISNT true. People leverage themselves all the time to make profit. It happens everyday (and happend quite a bit recently) when people borrowed money to buy home. They involved debt to try to make a profit.
"Creditors can sit back and expect their investment to come back to them or else go a get it back. But they can do nothing to push the business in any direction. They can only wait."
This ISNT true. Creditors can sell default risk to others, manage it in some other ways like CDO and MBS. They can always stop lending them money, not rolling over the debt, etc.
"(subject to legal and ethical restrictions, of course)."
This isnt an article on financial ethics or financial law. It's about FINANCE.
Wow - this "book" needs a TON of work.
So who created this page?
What ideas do we want to put across?
Obviously Wikipedia has quite a good page already. Can we expand this without duplicating?
Finance on Wikipedia
Contents |
[edit] Do we want to create a book or not?
This is as hell sure does not seem like a book, so who all would like to go in for a rewrite on this.
We need the following:
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- A name for the book - Yes, should it be Introduction to Finance? - this is PRIORITY
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1) Table of Contents - to be updated as the book progresses. 2) A chapter by chapter progression 3) Where do we stop at - Finance is highly specialized, so we need to know where we stop. If we do provide an introduction to finance, we can cover the basic steps.
Who all are interested in developing this???
--Venky 06:42, 30 January 2007 (UTC)
[edit] Changes made
I have added a To Do and a Contributors page. Kindly put in your additions to both the pages.
--Venky 06:46, 2 February 2007 (UTC)
One year later, I just re-wrote the Inroduction to the Time-Value of money and wrote also about the Discount Rate. --Alpapad (talk) 02:24, 13 February 2008 (UTC)
[edit] Book name changed to Principles of Finance
Dear all, I have changed the title of the book to Principles of Finance.
--Venky 07:06, 2 February 2007 (UTC)
[edit] Examples
If any one continues to work on it I think that the big difference between this and wikipedia articles on the same subject is lots more examples should be included.
[edit] Possible source of content
You may be interested in this transwiki. If you have another book in mind where the content may be useful, please leave a note on the relevant talk page. Thanks! – Mike.lifeguard | talk 04:55, 8 October 2007 (UTC)
