Dr. Anthony M. Criniti IV - The Necessity of Finance: An Overview of the Science of Management of Wealth for an Individual, a Group, or an Organization

An Overview of the Science of Management of Wealthfor an Individual, a Group, or an Organization

by

Dr. Anthony M. Criniti IV

Criniti Publishing

Copyright 2012 by Dr. Anthony M. Criniti IV

All rights reserved.

Published by Criniti Publishing, Philadelphia, PA

Criniti Publishing, Philadelphia, PA

The text of this publication, or any of its parts,may not be reproduced in any manner without the prior writtenpermission of the author.

This publication is for informational purposes only.It is sold with the understanding that the author and the publisherare not engaged in providing financial, legal, or otherprofessional services. If financial, legal, or any other form ofadvice is needed, please consult a financial adviser, an attorney,or another professional advice-giving entity.

I would like to dedicate this book to my parents towhom I owe my life. They have made countless sacrifices for me sothat I can one day fulfill my own dreams. I may never truly feelthe pain of what you have been through to persistently guide such adifficult child and I may never be able to repay you. Instead, myeducational accomplishments and this book was my plan to show youmy appreciation.

Table of Contents

This book was created to assist many peoplein understanding the basics of finance, the science of wealthmanagement for an individual, a group, or an organization. As afinance professor and former financial consultant, I have oftenwitnessed the difficulties people have faced in understanding thisvery complex subject. Although many aspects of finance have verysimple origins, the subject has evolved into the extremelycomplicated form we know today, particularly in the last fiftyyears. Many people complain that finance is too confusing. Anindividuals experience with finance may be better if he or shereads a preliminary book written in everyday terms that can helphim or her to understand the subject more clearly before he or sheengages in formal study. This book is a reflection of my attempt todemonstrate the complex nature of finance in a more understandableway.

The title of this text reflects a radicalview of thinking about the subject of finance, which has simpleroots in the beginning of civilization. However, modern finance, astaught in American universities, only began in the 1950s. Althoughit is taught as a separate subject, and the distinction betweenfinance and economics and other similar subjects may seem obvious,many of the founding fathers of modern finance are self-admittedeconomists. Also most of the major theories were created byeconomists, physicists, mathematicians, etc. No wonder finance isoften confused with other subjects.

With world wealth accumulating to its highestpoint in history, the necessity to understand this subject is morecrucial than ever. This book highlights the need to give fullrespect to finance as a separate science and clears up many of theconfusions with related subjects such as economics. It also coinsthe word financialists to identify the scientists in thisfield.

This book starts with an introduction aboutthe need for finance. Next the definition, purpose, goals, andhistory of finance and economics are analyzed. This book alsoexplores the basic terminology necessary to understanding finance.For example, what is the difference between money and wealth? Whatis the difference between investing and saving? What is risk andreturn? What is the time value of money? Other major financialquestions are analyzed as well. For example, what are the differenttechniques for selecting investments? What are the differentbranches of finance that currently exist? What kinds of investmentsexist? What role does ethics play in finance?

Although this book is targeted at beginner tointermediate-level financial students and anyone interested in thesubject with or without limited financial experience, it is alsorelevant for master-level students and beyond. For advancedstudents and practitioners, this book may serve as a tool to helpreflect on and reevaluate the concepts they were taught in financefrom a simpler alternative perspective. I believe simplicity, whendemonstrated in its purest sense, has a way of transforming aconcept or subject into something with a totally different meaning.I hope to have this effect. All I ask is that the advanced studentsand practitioners read this book with an open mind and deeplyreflect on all of the simpler terms we often take for granted.

Finance is a very promising science that canbe helpful to all who spend time studying and practicing it.However, I want to be clear that it is not easy for the averagestudent. This book is not a substitute for your required college oruniversity financial textbooks and reading it may not make you amillionaire. However, this book may serve as a supplementallearning tool that may clarify expectations of your futurefinancial journeys, whether its learning in a university orinvesting in the marketplace.

The information is this book covers a widevariety of topics. Some material may interest you, and some maynot. The best way to approach this book is to take your time andreflect on the ideas and concepts. You are encouraged to take notesand review sections that are of interest to you. Later, if youdecide to take a finance class, you can always refer back to thisbook for maximum results.

Finally, I have attempted to write this bookas objectively as possible, but from time to time my opinions mayappear. However, this should have a very limited effect on the maingoals of the book, which are to demonstrate the necessity offinance; to clarify the definition, purpose, and goals of bothfinance and economics; to explore financial concepts using asimpler approach; and to attract more interest in this field. Happyreading!

The Mother of Invention

There is an old saying: necessity is themother of invention. Throughout history it has seldom been provenfalse. Humans have made every tool and machine to meet their needsfrom the beginning of time. If we needed a tool to fish in order toeat, we made it. If we needed a pot to cook the fish in, we madeit. When we needed a lot more fish to feed a larger population, wemade a boat to take us to them. And so on until the present day,where we have every tool, machine, and form of transportationnecessary to allow a human in one part of the world to eat a rarefish from another part of the world the day after its caught.

This old saying can also be applied tofinance. The subject was invented to fill the need of understandingof a subject thats entirely too important to ignore. In earlycivilizations humans performed all of life's required tasks alone.Each person was a one-stop shop. That is, a man built his ownhouse, caught and cooked his own food, made his own clothes,etc.

This all changed as civilization progressedand work was spread out amongst many people. This was called thedivision of labor, and it created specialization. Withdivision of labor, one man fished, another man hunted, and anotherman crafted the tools for each of these trades. A man could trade aday's labor of his specialty for a day's labor of another man's,for example a fisherman and a hunter. This process of bartering,along with division of labor, eventually gave birth to money tohelp facilitate the exchange. Between the time of bartering and thepresent, the need for understanding our complex monetary and wealthsystem has escalated to its highest point.

Now more than ever, there is a necessity torecognize the significance of finance. Now more than ever, there isa necessity to learn the science of finance.

Finance and Science

Finance is not a traditional type of sciencecompared to the natural sciences. When the average person thinks oftraditional sciences he or she thinks of experiments conducted inisolated labs by scientists wearing white coats while bubblingglass tubes are displayed in the background. This is not the casefor finance. You can't physically dissect a balance sheet with aknife like you can an earthworm. You can dissect it mentally,though. You can't test financial ratios like you can with chemicalsin beakers at various degrees of heat. However, you can performcalculations for the ratios and then interpret them based offknowledge of similar companies financial positions from ahistorical perspective.