From the course: Corporate Finance Foundations

Finance outside of companies

- So where does a company go to get the money it needs to purchase the things it wants? You put an ad in the paper? Is there a 1-800 number you can call? A critical part of finance is matching those who need money with those who have money. Companies need money, there are savers who have money, and there are many who will match those with money to those who need money. Let's think about all the economic activity in the world as a sea, an ocean with three kinds of players swimming around in that ocean. First, there are the entrepreneurs, the creators, the doers, people and organizations with ideas, objectives, and dreams. They are swimming around out there in the economic sea. There are also investors swimming around out there. These are entities, individuals, and companies who have saved money in the past and are now ready to lend it to or invested in somebody else. Finally, there are facilitators swimming around out there. These are specialized financial institutions that will match up the entrepreneurs, who have ideas but don't have money, with the investors who've got the money. So in the economic environment, outside of companies, we've got entrepreneurs, we've got investors, and we've got facilitators. Now, what about those investors and savers, what are they thinking about? Well, they're looking at their investment opportunities. Under what conditions, under what circumstances, and with what contracts should they provide money to entrepreneurs? Should they lend the money? Should they invest the money? There are different risks and returns depending on the choice made here. What about those investors' portfolio of investments? They probably don't want to risk everything they have in one big investment, so what different things should they invest in? And the facilitators, the financial institutions, who are they? There are banks, there are mutual funds, there are private equity funds, there are insurance companies, and there are investment banks. They bring together the entrepreneurs who need money with the investors who have money. There are all kinds of entities, entrepreneurs, investors, and facilitators, swimming around out there in the economic sea. Finance allows us to look at each of these entities and how they interact one with another. But finance is much bigger than obtaining funding on the entrepreneur side of things and providing money on the investor side of things. So an important part of finance is the function of matching those with money to those who need money.

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