Principles of Finance

The nature of finance is generally not well understood.

The three types of financial entities I want to discuss are publicly traded companies, privately held companies, otherwise known as partnerships, and non profits.

Each of these kinds of financial entities could be called a storehouse for wealth. They each could be called a kind of bank. Investors deposit funds into these banks in the expectation of a return on their investment. This return is of two types. First, investors expect the entity to apply the funds deposited towards what is called "the means of production", and they expect the result to be what is called production, or products, or industry. (The word industry has two connotations. One is factories and the like, and a stream of goods and services. The other, which is more old fashioned, is simply productive work.)

The second expectation that investors have is a financial return on their investment. This expectation is often mistaken for greed. It is true that the desire for wealth is an important motivator in human affairs, and perhaps that is greed, but perhaps a distinction can be made between the desire for wealth and greed. It is true that investors can be greedy, and charlatans, or fools, can cater to that impulse with ill constructed schemes, but that tends to lead to trouble. Fools get punished. But there is a deeper meaning to return on investment. When people work, they can acquire wealth, and one thing they can do with that wealth is store it for the future. Public companies and partnerships, and also, banks, create opportunities for storing wealth, and, simultaneously, for putting that wealth to productive use, which can be, on the one hand, a benefit to society, and, at the same time, offers investors the opportunity to increase their wealth, through the simple act of investing, which is, at its root, saving.