Finance is comprised of 3 interrelated major areas: (1) money and capital markets, which deals with securities markets and financial institutions; (2) investments, which focuses on the decisions made by both individual and institutional investors as they choose securities for their investment portfolios; and (3) financial management, or "business finance,” which involves decisions within firms. The career/job opportunities within each field are many and varied, but financial managers must have a knowledge of all three areas if they are to do their jobs well.
(Picture) Areas of Finance
MONEY AND CAPITAL MARKETS
Many finance majors go to work for financial institutions, including banks, insurance companies, mutual funds, and investment banking firms. For success here, one needs a knowledge of valuation techniques, the factors that cause interest rates to rise and fall, the regulations to which financial institutions are subject, and the various types of financial instruments (mortgages, auto loans, certificates of deposit, and so on). One also needs a general knowledge of all aspects of business administration, because the management of a financial institution involves accounting, marketing, personnel, and computer systems, as well as financial management. An ability to communicate, both orally and in writing, is important, and "people skills,” or the ability to get others to do their jobs well, are critical.
Finance graduates who go into investments often work for a brokerage house such as Merrill Lynch, either in sales or as a security analyst. Others work for banks, mutual funds, or insurance companies in the management of their investment portfolios; for financial consulting firms advising individual investors or pension funds on how to invest their capital; for investment banks whose primary function is to help businesses raise new capital; or as financial planners whose job is to help individuals develop long-term financial goals andportfolios. The three main functions in the investments area are sales, analyzing individual securities, and determining the optimal mix of securities for a given investor.
Financial management is the broadest of the three areas, and the one with the most job opportunities. Financial management is important in all types of businesses, including banks and other financial institutions, as well as industrial and retail firms. Financial management is also important in governmental operations, from schools to hospitals to highway departments. The job opportunities in financial management range from making decisions regarding plant expansions to choosing what types of securities to issue when financing expansion. Financial managers also have the responsibility for deciding the credit terms under which customers may buy, how much inventory the firm should carry, how much cash to keep on hand, whether to acquire other firms (merger analy-
sis), and how much of the firm’s earnings to plow back into the business versus pay out as dividends.
Regardless of which area a finance major enters, he or she will need a knowledge of all three areas. For example, a bank lending officer cannot do his or her job well without a good understanding of financial management, because he or she must be able to judge how well a business is being operated. The same thing holds true for Merrill Lynch's security analysts and stockbrokers, who must have an understanding of general financial principles if they are to give their customers intelligent advice. Similarly, corporate financial managers need to know what their bankers are thinking about, and they also need to know how investors judge a firm's performance and thus determine its stock price. So, if you decide to make finance your career, you will need to know something about all three areas.
But suppose you do not plan to major in finance. Is the subject still important to you? Absolutely, for two reasons: (1) You need a knowledge of finance to make personal decisions, ranging from investing for your retirement to deciding whether to lease versus buy a car. (2) Virtually all important business decisions have financial implications, so important decisions are generally made by teams from the accounting, finance, legal, marketing, personnel, and production departments. Therefore, if you want to succeed in the business arena, you must be highly competent in your own area, say, marketing, but you must also have a familiarity with the other business disciplines, including finance.
Thus, there are financial implications in virtually all business decisions, and non-financial executives simply must know enough finance to work these implications into their own specialized analyses. Because of this, every student of business, regardless of his or her major, should be concerned with financial management.