The lender can find
a borrower, a financial intermediary,
such as a bank or buy notes or bonds
in the bond market. The lender receives
interest, the borrower pays a higher
interest than the lender receives,
and the financial intermediary pockets
the difference.
A bank aggregates the activities of
many borrowers and lenders. A bank
accepts deposits from lenders, on
which it pays the interest. The bank
then lends these deposits to borrowers.
Banks allow borrowers and lenders
of different sizes to coordinate their
activity.
Banks are thus compensators of money
flows in space since they allow different
lenders and borrowers to meet, and
in time, since every borrower, in
theory, will eventually pay back.
A specific example of corporate finance
is the sale of stock by a company
to institutional investors like investment
banks, who in turn generally sell
it to the public. The stock gives
whoever owns it part ownership in
that company.
If you buy one share
of XYZ Inc, and they have 100 shares
available, you are 1/100 owner of
that company.
You own 1/100 of the net difference
between assets and liabilities on
the balance sheet. Of course, in return
for the stock, the company receives
cash, which it uses to expand its
business in a process called "equity
financing".
Equity financing mixed with the sale
of bonds (or any other debt financing)
is called the company's capital structure.
Finance is used by individuals (personal
finance), by governments (public finance),
by businesses (corporate finance),
etc., as well as by a wide variety
of organizations including schools
and non-profit organizations.
In general, the goals of each of the
above activities are achieved through
the use of appropriate financial instruments,
with consideration to their institutional
setting.