Finance
refers to the management, movement, and raising of money,
with the related concepts of business finance, investments, and financial markets and institutions.
"Finance" also refers to the academic discipline that studies these. Based on the scope of financial activities, the discipline can be divided into the three primary branches personal-, corporate-, and public finance. In the "financial system", 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. 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. As a subject of study, "finance" is related to the fields of economics (the study of the production, distribution, and consumption of goods and services) and business administration (the management of an organization's resources to achieve its goals). 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 (personal finance), governments (public finance), and businesses (corporate finance). "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 an 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: (i) by borrowing in the form of a loan (private individuals), or by selling government or corporate bonds; (ii) by a corporation selling equity, also called stock or shares (which may take various forms: preferred stock or common stock). 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. (See Financial market participants.) The lending is often indirect, through a financial intermediary such as a bank, or via the purchase of notes or bonds (corporate bonds, government bonds, or mutual 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 (which find the initial investors and facilitate the listing of the securities, typically shares and bonds), the securities exchanges (which allow their trade thereafter), and the various investment service providers (including mutual funds, pension funds, wealth managers, and stock brokers, typically servicing retail investors). 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 (or "quants", see below). 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:
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