Finance


Finance refers to monetary resources and to the study and discipline of money, currency, assets and liabilities. As a subject of study, it is a field of business administration which involves the planning, organizing, leading, and controlling of an organization's resources to achieve its goals. Based on the scope of financial activities in financial systems, the discipline can be divided into personal, corporate, and public finance.
In these financial systems, assets are bought, sold, or traded as financial instruments, such as currencies, loans, bonds, shares, stocks, options, futures, swaps, etc. Assets can also be banked, invested, and insured to maximize value and minimize loss. In practice, risks are always present in any financial action and entities.
Due to its wide scope, a broad range of subfields exists within finance. Asset-, money-, risk- and investment management aim to maximize value and minimize volatility. Financial analysis assesses the viability, stability, and profitability of an action or entity. Some fields are multidisciplinary, such as mathematical finance, financial law, financial economics, financial engineering and financial technology. These fields are the foundation of business and accounting. In some cases, theories in finance can be tested using the scientific method, covered by experimental finance.
The early history of finance parallels the early history of money, which is prehistoric. Ancient and medieval civilizations incorporated basic functions of finance, such as banking, trading and accounting, into their economies. In the late 19th century, the global financial system was formed.
In the middle of the 20th century, finance emerged as a distinct academic discipline, separate from economics. The earliest doctoral programs in finance were established in the 1960s and 1970s. Today, finance is also widely studied through career-focused undergraduate and master's level programs.

The financial system

As outlined, the financial system consists of the flows of capital that take place between individuals and households, governments, and businesses. "Finance" thus studies the process of channeling money from savers and investors to entities that need it. Savers and investors have money available which could earn interest or dividends if put to productive use. Individuals, companies and governments must obtain money from some external source, such as loans or credit, when they lack sufficient funds to run their operations.
In general, an entity whose income exceeds its expenditure can lend or invest the surplus with the aim of earning a fair return. Correspondingly, an entity where income is less than expenditure can raise capital usually in one of two ways: by borrowing in the form of a loan, or by selling government or corporate bonds; by a corporation selling equity, also called stock or shares. The owners of both bonds and stock may be institutional investors—financial institutions such as investment banks and pension funds—or private individuals, called private investors or retail investors.
The lending is often indirect, through a financial intermediary such as a bank, or via the purchase of 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 earns the difference for arranging the loan.
A bank aggregates the activities of many borrowers and lenders. Banks accept deposits from individuals and businesses, paying interest on these funds. The bank then lends these deposits to borrowers, facilitating transactions between borrowers and lenders of various sizes and enabling efficient financial coordination. Investing typically entails the purchase of stock, either individual securities or via a mutual fund, for example. Stocks are usually sold by corporations to investors so as to raise required capital in the form of "equity financing", as distinct from the debt financing described above. The financial intermediaries here are the investment banks, the securities exchanges, and the various investment service providers.
"Since the 2010s, financial technology has significantly transformed traditional financial services delivery. Mobile payment systems, digital wallets, and peer-to-peer lending platforms have created alternative channels for financial transactions, reducing reliance on conventional banking infrastructure in both developed and emerging markets. Additionally, Environmental, Social, and Governance considerations have become integral to investment analysis and portfolio management, with sustainable finance representing a growing segment of global capital markets, reaching US$30.3 trillion in assets under management globally as of 2022."
Inter-institutional trade and investment, and fund-management at this scale, is referred to as "wholesale finance".
Institutions here extend the products offered, with related trading, to include bespoke options, swaps, and structured products, as well as specialized financing; this "financial engineering" is inherently mathematical, and these institutions are then the major employers of quantitative analysts. In these institutions, risk management, regulatory capital, and compliance play major roles.

Areas of finance

As outlined, finance broadly comprises three areas: personal finance, corporate finance, and public finance. These, in turn, overlap and employ various activities and sub-disciplines—chiefly investments, risk management, and quantitative finance.

Personal finance

Personal finance refers to the practice of budgeting to ensure enough funds are available to meet basic needs, while ensuring there is only a reasonable level of risk to lose said capital. Personal finance may involve paying for education, financing durable goods such as real estate and cars, buying insurance, investing, and saving for retirement. Personal finance may also involve paying for a loan or other debt obligations. The main areas of personal finance are considered to be income, spending, saving, investing, and protection. The following steps, as outlined by the Financial Planning Standards Board, suggest that an individual will understand a potentially secure personal finance plan after:
  • Purchasing insurance to ensure protection against unforeseen personal events;
  • Understanding the effects of tax policies, subsidies, or penalties on the management of personal finances;
  • Understanding the effects of credit on individual financial standing;
  • Developing a savings plan or financing for large purchases ;
  • Planning a secure financial future in an environment of economic instability;
  • Pursuing a checking or a savings account;
  • Preparing for retirement or other long term expenses.

    Corporate finance

Corporate finance deals with the actions that managers take to increase the value of the firm to the shareholders, the sources of funding and the capital structure of corporations, and the tools and analysis used to allocate financial resources. While corporate finance is in principle different from managerial finance, which studies the financial management of all firms rather than corporations alone, the concepts are applicable to the financial problems of all firms, and this area is then often referred to as "business finance".
Typically, "corporate finance" relates to the long term objective of maximizing the value of the entity's assets, its stock, and its return to shareholders, while also balancing risk and profitability. This entails three primary areas:
  1. Capital budgeting: selecting which projects to invest in—here, accurately determining value is crucial, as judgements about asset values can be "make or break".
  2. Dividend policy: the use of "excess" funds—these are to be reinvested in the business or returned to shareholders.
  3. Capital structure: deciding on the mix of funding to be used—here attempting to find the optimal capital mix re debt-commitments vs cost of capital.
The latter creates the link with investment banking and securities trading, as above, in that the capital raised will generically comprise debt, i.e. corporate bonds, and equity, often listed shares. Re risk management within corporates, see [|below].
Financial managers—i.e. as distinct from corporate financiers—focus more on the short term elements of profitability, cash flow, and "working capital management", which is concerned about the daily funding operations, and the goal is to maintain liquidity, minimize risk and maximize efficiency ensuring that the firm can safely and profitably carry out its financial and operational objectives; i.e. that it: can service both maturing short-term debt repayments, and scheduled long-term debt payments, and has sufficient cash flow for ongoing and upcoming operational expenses.

Public finance

Public finance refers to the management of finances related to sovereign states, sub-national entities, and associated public agencies or bodies. It generally encompasses a long-term strategic perspective regarding investment decisions that affect public entities. These long-term strategic periods typically encompass five or more years. Public finance is primarily concerned with:
Central banks, such as the Federal Reserve System banks in the United States, the European Central Bank and the Bank of England in the United Kingdom, are strong players in public finance. They act as lenders of last resort as well as strong influences on monetary and credit conditions in the economy.
Development finance, which is related, concerns investment in economic development projects provided by a governmental institution on a non-commercial basis; these projects would otherwise not be able to get financing. A public–private partnership is primarily used for infrastructure projects: a private sector corporate provides the financing up-front, and then draws profits from taxpayers or users.
Climate finance, and the related Environmental finance, address the financial strategies, resources and instruments used in climate change mitigation.