Why should you study "Finance"?

(This is reproduction of Author's response to a Question on Quora similar to the title question)

Let's start by saying this - You should do everything and anything you love to do (Unless it is Illegal, immoral or involves listening to Justin Bieber, kidding ;))

Now, that being said lets get to the point - Why Study (read "love") Finance -

• Finance is one of the most oldest and vital stream of studies -
  Think about this for a moment, one of the oldest problems in the history of mankind is either lack of money or lack of planning to use the excess money in hand, and; what is the solution : Study of Financial Concepts to put idle money to work and plan and/or prioritize the use of scarce funds
• Finance is everywhere -
  Every person needs to manage his financial resources, plan for children education, put adequate amount on the paper for planning retirement; in a nutshell that is "Personal Finance" for you.
  Now replace an individual by an organisation, think about M&As, Raising Capital, Equities, Debtor Management, Loans and Advances, Expansion/Contraction of business, that is "Corporate Finance" more or less. You notice the pattern, you do anything it will more or less would already have or will have intervention of Finance

  

• Finance can teach you a lot about life in general -
  At the risk of sounding extremely philosophical and a godman wannabe, I would like to draw your attention towards the astonishing similarities between life and finance; Compounding/Discounting, Opportunity Rate of Interest, Arbitrage.. the list goes on, you can google and find very interesting articles discussing the application of these concepts of finance to situations in life.
  I would like to mention the example of concept of "Valuation" here. Finance draws a clear cut line between "Value" and "Price" of something. There is a whole sub-stream under finance dedicated to distinguishing "Price" of an asset(i.e. What it is selling at/quoted at in Market) and the "Value" of an asset (i.e. How much it is worth, what is its intrinsic self). It ponders that you can benefit if you part ways with an asset which is overvalued(read hyped/overrated) and invest in something which is undervalued( read underdog). Let's throw a quote by Oscar Wilde here to illustrate the difference between valuation and pricing in life (and to make the answer a bit fancy and for just the sake of quoting Mr. Wilde)

  

  Now, isn't it a magnificent exercise which we should adopt in our lives also?
  Oscar Wilde said it on the basis of his blissful literary intellect. It seems like Mr. Buffet also agrees with the same on the basis of his blissful knowledge of finance

  

• It is very interesting and (still)evolving field of studies -
  It's entirely your choice to study and exercise the laid down concepts, trading techniques and theories, or; go ahead and tread in the unexplored sea of research and finding new stuff, patterns and observations
• Like many other fields out there, it pays well. You can earn well if you learn well.

Irrespective of every specific reason, almost all streams will cater to someone's curiosity and interest, land you in a comfortable job and offer you something new to learn, and, you can have "n" number of reasons to do a thing or not, BUT; do what makes you happy, study what you find interesting, because at the end of the day, that is the wisest thing you can do :)

VIDEO : Cash Flows – Operating Activities

How Banks make Money ?–A Quick Analysis

How Banks make money is something which comes to mind of many of us when we hear about their reported profits, come across their financial statements and when we watch an analyst on any business news channel talking about profit maneuvers and earning or growth possibilities of banking sector. To answer this question we must take a look on different type of “banks” in the market.

In market we can come across either Pure Retail Banks (For example; Dena Bank, Allahabad Bank, SBBJ etc.), Pure Investment Banks (For example; JP Morgan, Goldman Sachs etc) and a an intermediate category of banks which act as both Retail and Investment Banks (For example; Axis Bank, IDBI, HSBC, ICICI, Citi Bank, Deutsche Bank, Kotak Mahindra Bank Limited etc.).

So, in a nutshell, so far this article has led us to a conclusion that majorly, banking revenue and profit generating activities can be divided into two broad categories:

Retail Banking –

Retail bank consists of activities which are generally coined to fulfill the financial needs and services required by a retail individual service consumer or small sized corporate entities. Major activities carried out by a bank in retail banking sphere of services are as follows:  

 

ü Organizing Loans & Mortgages for Retail Consumers

ü Maintaining Saving Accounts, Currents A/Cs etc

ü Maintaining FDs and other deposits etc

ü Furnishing Loans to Retail Consumers for their various needs

ü  Bank charges an interest rate (say X₁) from all its clients to whom it lends money accompanied with other charges like service fees, accountant maintenance fees, paperwork charges etc. and pays at an interest rate (say X₂)(of course X1>X2),  to all its clients who have deposited their money in the bank and hence, Retail Banks earn an interest margin(or Intt. Differential) on all of the above transactions plus pockets a fair amount of service charges. So, in a nutshell, tagline of Retail Banking is- Lend at high rates, Borrow at low rates and eat margin while doing both

Characteristics of Retail Banking: Low Risk, Solid Cash Flow Generating Sector (from bank’s perspective)

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Investment Banking –

Investment Banking is one of the Chief Operations in modern banking, if you have heard of any major M&A activity recently, read about an upcoming IPO/FPO, or have seen a report on an upcoming business deal; you must consider that in one way or other, Investment Bank(s) are involved in these. Some of the Major Activities carried on by an Investment Bank are as follows:

ü  Proprietary Trading

§  Taking care of Bank’s Money at Hand

§  Using money with bank to make money

§  Taking Investment Decisions

§  Financial & Liquidity Management

ü  Market Making

§  Trade at several types of trading market to maintain flow in the market (let’s call it maintaining the demand-supply equilibrium on a micro level by banks for simplicity)

§  For understanding this feature of banking, we must understand that in a trading market, every prospective buyer of stuff needs a prospective seller who can sell him the requisite stuff as and when required and similarly a seller in a market needs a buyer already existing in the market, an investment bank monetizes this situation by acting as a seller or buyer at different times. Technically speaking, an investment bank carries a long or short position depending upon the type and need of the client and charges a “premium” or “margin” or “service charge” for doing the same

ü  Merger & Acquisitions

§  Investment Banks render services by the way of providing advice on Mergers

§  Every major prospective acquirer or absorber seeks the advice of Investment Banks to decide about the valuation of target, its growth prospective, market sentiment about the target etc

§  For such M&A advising and assistance bank charges advising fees which is known by various names, such fees can be fixed or may depend on the size of the deal

ü  Assisting Corporate Events

§  Assisting various corporate clients for corporate deals and other events including publicity events, brand management, service feedback procurement etc

§  Helping in issuance of Debt

ü  New Issues

§  Investment Bank also helps in issuance of New Equity (and even in issuance of further equity). In other words banks contribute in issuance of IPO/FPO

§  Investment Bank also acts as underwriter of shares and charges underwriting commission for the same

ü  Structured Products

§  Investment Banks assist in design and sales of various Financial Securities/Instruments or a group/combination of them

Characteristics of Investment Banking: High Risk, High Expected CF but proper financial management and employment of risk minimization tactics is required 

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