The word finance means

«Financial» redirects here. For the Georgian newspaper, see The Financial.

Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, which is the study of production, distribution, and consumption of money, assets, goods and services (the discipline of financial economics bridges the two).
Finance activities take place in financial systems at various scopes, thus the field can be roughly divided into personal, corporate, and public finance.
^[a]

In a financial system, assets are bought, sold, or traded as financial instruments, such as currencies, loans, bonds, shares, stocks, options, futures, 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.

A broad range of subfields within finance exists due to its wide scope. Asset, money, risk and investment management aim to maximize value and minimize volatility. Financial analysis is the viability, stability, and profitability assessment of an action or entity. In some cases, theories in finance can be tested using the scientific method, covered by experimental finance.

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.

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.^[1] (The first academic journal, The Journal of Finance, began publication in 1946.) The earliest doctoral programs in finance were established in the 1960s and 1970s.^[2]
Finance is today also widely studied through career-focused undergraduate and master’s level programs.
^[3][4]

The financial system[edit]

As above, 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. ^[b]
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 operate.

In general, an entity whose income exceeds its expenditure can lend or invest the excess, intending to earn 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.^[6][7][8]
A bank aggregates the activities of many borrowers and lenders. A bank accepts deposits from lenders, on which it pays interest. The bank then lends these deposits to borrowers. Banks allow borrowers and lenders, of different sizes, to coordinate their activity.

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 investment banks find the initial investors and facilitate the listing of the securities, typically shares and bonds.
Additionally, they facilitate the securities exchanges, which allow their trade thereafter, as well as the various service providers which manage the performance or risk of these investments. These latter include mutual funds, pension funds, wealth managers, and stock brokers, typically servicing retail investors (private individuals).

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 «quants» (see below).
In these institutions, risk management, regulatory capital, and compliance play major roles.

Areas of finance[edit]

As outlined, finance comprises, broadly, the three areas of 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[edit]

Personal finance is defined as «the mindful planning of monetary spending and saving, while also considering the possibility of future risk».^[9] Personal finance may involve paying for education, financing durable goods such as real estate and cars, buying insurance, investing, and saving for retirement.^[10]
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.^[11]
The following steps, as outlined by the Financial Planning Standards Board,^[12] 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 (auto, education, home);
• Planning a secure financial future in an environment of economic instability;
• Pursuing a checking and/or a savings account;
• Preparing for retirement or other long term expenses.^[13]

Corporate finance[edit]

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,^[14]
and this area is then often referred to as «business finance».

Typically, then, «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 ^[15] 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» ^[16]
2. Dividend policy: the use of «excess» funds – are these 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» (inventory, credit and debtors), ensuring that the firm can safely and profitably carry out its financial and operational objectives; i.e. that it:
(1) can service both maturing short-term debt repayments, and scheduled long-term debt payments,
and (2) has sufficient cash flow for ongoing and upcoming operational expenses.
See Financial management § Role and Financial analyst § Corporate and other.

Public finance[edit]

Public finance describes finance as related to sovereign states, sub-national entities, and related public entities or agencies. It generally encompasses a long-term strategic perspective regarding investment decisions that affect public entities.^[17] These long-term strategic periods typically encompass five or more years.^[18] Public finance is primarily concerned with: ^[19]

• Identification of required expenditures of a public sector entity;
• Source(s) of that entity’s revenue;
• The budgeting process;
• Sovereign debt issuance, or municipal bonds for public works projects.

Central banks, such as the Federal Reserve System banks in the United States 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.^[20]

Development finance, which is related, concerns investment in economic development projects provided by a (quasi) governmental institution on a non-commercial basis; these projects would otherwise not be able to get financing.
See Public utility § Finance.
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 and/or users.

Investment management[edit]

Investment management ^[21][22][14] is the professional asset management of various securities – typically shares and bonds, but also other assets, such as real estate, commodities and alternative investments – in order to meet specified investment goals for the benefit of investors.

As above, investors may be institutions, such as insurance companies, pension funds, corporations, charities, educational establishments, or private investors, either directly via investment contracts or, more commonly, via collective investment schemes like mutual funds, exchange-traded funds, or REITs.

At the heart of investment management^[14] is asset allocation – diversifying the exposure among these asset classes, and among individual securities within each asset class – as appropriate to the client’s investment policy, in turn, a function of risk profile, investment goals, and investment horizon (see Investor profile). Here:

• Portfolio optimization is the process of selecting the best portfolio given the client’s objectives and constraints.
• Fundamental analysis is the approach typically applied in valuing and evaluating the individual securities.

Overlaid is the portfolio manager’s investment style – broadly, active vs passive, value vs growth, and small cap vs. large cap – and investment strategy.

In a well-diversified portfolio, achieved investment performance will, in general, largely be a function of the asset mix selected, while the individual securities are less impactful. The specific approach or philosophy will also be significant, depending on the extent to which it is complementary with the market cycle.

A quantitative fund is managed using computer-based techniques (increasingly, machine learning) instead of human judgment. The actual trading also, is typically automated via sophisticated algorithms.

Risk management[edit]

Risk management, in general, is the study of how to control risks and balance the possibility of gains; it is the process of measuring risk and then developing and implementing strategies to manage that risk.
Financial risk management
^[23][24] is the practice of protecting corporate value against financial risks, often by «hedging» exposure to these using financial instruments.
The focus is particularly on credit and market risk, and in banks, through regulatory capital, includes operational risk.

• Credit risk ^[25] is the risk of default on a debt that may arise from a borrower failing to make required payments;
• Market risk relates to losses arising from movements in market variables such as prices and exchange rates;
• Operational risk relates to failures in internal processes, people, and systems, or to external events.

Financial risk management is related to corporate finance^[14] in two ways.
Firstly, firm exposure to market risk is a direct result of previous capital investments and funding decisions;
while credit risk arises from the business’s credit policy and is often addressed through credit insurance and provisioning.
Secondly, both disciplines share the goal of enhancing or at least preserving, the firm’s economic value, and in this context^[26] overlaps also enterprise risk management, typically the domain of strategic management.
Here, businesses devote much time and effort to forecasting, analytics and performance monitoring.
See also «ALM» and treasury management.

For banks and other wholesale institutions,^[27] risk management focuses on managing, and as necessary hedging, the various positions held by the institution – both trading positions and long term exposures – and on calculating and monitoring the resultant economic capital, and regulatory capital under Basel III.
The calculations here are mathematically sophisticated, and within the domain of quantitative finance as below.
Credit risk is inherent in the business of banking, but additionally, these institutions are exposed to counterparty credit risk.
Banks typically employ Middle office «Risk Groups» here, whereas front office risk teams provide risk «services» / «solutions» to customers.

Additional to diversification – the fundamental risk mitigant here – investment managers will apply various risk management techniques to their portfolios as appropriate:^[14]
these may relate to the portfolio as a whole or to individual stocks; bond portfolios are typically managed via cash flow matching or immunization.
Re derivative portfolios (and positions), «the Greeks» is a vital risk management tool – it measures sensitivity to a small change in a given underlying parameter so that the portfolio can be rebalanced accordingly by including additional derivatives with offsetting characteristics.

Quantitative finance[edit]

Quantitative finance – also referred to as «mathematical finance» – includes those finance activities where a sophisticated mathematical model is required,^[28] and thus overlaps several of the above.

As a specialized practice area, quantitative finance comprises primarily three sub-disciplines; the underlying theory and techniques are discussed in the next section:

1. Quantitative finance is often synonymous with financial engineering. This area generally underpins a bank’s customer-driven derivatives business – delivering bespoke OTC-contracts and «exotics», and designing the various structured products and solutions mentioned – and encompasses modeling and programming in support of the initial trade, and its subsequent hedging and management.
2. Quantitative finance also significantly overlaps financial risk management in banking, as mentioned, both as regards this hedging, and as regards economic capital as well as compliance with regulations and the Basel capital / liquidity requirements.
3. «Quants» are also responsible for building and deploying the investment strategies at the quantitative funds mentioned; they are also involved in quantitative investing more generally, in areas such as trading strategy formulation, and in automated trading, high-frequency trading, algorithmic trading, and program trading.

Financial theory[edit]

Financial theory is studied and developed within the disciplines of management, (financial) economics, accountancy and applied mathematics.
Abstractly,^[14][29] finance is concerned with the investment and deployment of assets and liabilities over «space and time»;
i.e., it is about performing valuation and asset allocation today, based on the risk and uncertainty of future outcomes while appropriately incorporating the time value of money.
Determining the present value of these future values, «discounting», must be at the risk-appropriate discount rate, in turn, a major focus of finance-theory.^[30]
Since the debate as to whether finance is an art or a science is still open,^[31] there have been recent efforts to organize a list of unsolved problems in finance.

Managerial finance[edit]

Managerial finance is the branch of management that concerns itself with the managerial application of finance techniques and theory, emphasizing the financial aspects of managerial decisions;
the assessment is per the managerial perspectives of planning, directing, and controlling.
The techniques addressed and developed relate in the main to managerial accounting and corporate finance:
the former allow management to better understand, and hence act on, financial information relating to profitability and performance; the latter, as above, are about optimizing the overall financial structure, including its impact on working capital.
The implementation of these techniques – i.e. financial management – is outlined above.
Academics working in this area are typically based in business school finance departments, in accounting, or in management science.

Financial economics[edit]

Financial economics ^[34] is the branch of economics that studies the interrelation of financial variables, such as prices, interest rates and shares, as opposed to real economic variables, i.e. goods and services.
It thus centers on pricing, decision making, and risk management in the financial markets, ^{[34] [29]} and produces many of the commonly employed financial models. (Financial econometrics is the branch of financial economics that uses econometric techniques to parameterize the relationships suggested.)

The discipline has two main areas of focus:
^[29]
asset pricing and corporate finance; the first being the perspective of providers of capital, i.e. investors, and the second of users of capital; respectively:

• Asset pricing theory develops the models used in determining the risk-appropriate discount rate, and in pricing derivatives; and includes the portfolio- and investment theory applied in asset management. The analysis essentially explores how rational investors would apply risk and return to the problem of investment under uncertainty, producing the key «Fundamental theorem of asset pricing». Here, the twin assumptions of rationality and market efficiency lead to modern portfolio theory (the CAPM), and to the Black–Scholes theory for option valuation. At more advanced levels – and often in response to financial crises – the study then extends these «Neoclassical» models to incorporate phenomena where their assumptions do not hold, or to more general settings.
• Much of corporate finance theory, by contrast, considers investment under «certainty» (Fisher separation theorem, «theory of investment value», Modigliani–Miller theorem). Here, theory and methods are developed for the decisioning about funding, dividends, and capital structure discussed above. A recent development is to incorporate uncertainty and contingency – and thus various elements of asset pricing – into these decisions, employing for example real options analysis.

Financial mathematics[edit]

Financial mathematics ^[35] is the field of applied mathematics concerned with financial markets;
Louis Bachelier’s doctoral thesis, defended in 1900, is considered to be the first scholarly work in this area.
The field is largely focused on the modeling of derivatives – with much emphasis on interest rate- and credit risk modeling – while other important areas include insurance mathematics and quantitative portfolio management.
Relatedly, the techniques developed are applied to pricing and hedging a wide range of asset-backed, government, and corporate-securities.

As above, in terms of practice, the field is referred to as quantitative finance and / or mathematical finance, and comprises primarily the three areas discussed.
The main mathematical tools and techniques are, correspondingly:

• for derivatives,^[36] Itô’s stochastic calculus, simulation, and partial differential equations; see aside boxed discussion re the prototypical Black-Scholes and the various numeric techniques now applied
• for risk management,^[27] value at risk, stress testing, «sensitivities» analysis (applying the «greeks»), and xVA; the underlying mathematics comprises mixture models, PCA, volatility clustering and copulas.^[37]
• in both of these areas, and particularly for portfolio problems, quants employ sophisticated optimization techniques

Mathematically, these separate into two analytic branches:
derivatives pricing uses risk-neutral probability (or arbitrage-pricing probability), denoted by «Q»;
while risk and portfolio management generally use physical (or actual or actuarial) probability, denoted by «P».
These are interrelated through the above «Fundamental theorem of asset pricing».

The subject has a close relationship with financial economics, which, as above, is concerned with much of the underlying theory that is involved in financial mathematics: generally, financial mathematics will derive and extend the mathematical models suggested.
Computational finance is the branch of (applied) computer science that deals with problems of practical interest in finance, and especially ^[35] emphasizes the numerical methods applied here.

Experimental finance[edit]

Experimental finance^[38]
aims to establish different market settings and environments to experimentally observe and provide a lens through which science can analyze agents’ behavior and the resulting characteristics of trading flows, information diffusion, and aggregation, price setting mechanisms, and returns processes. Researchers in experimental finance can study to what extent existing financial economics theory makes valid predictions and therefore prove them, as well as attempt to discover new principles on which such theory can be extended and be applied to future financial decisions. Research may proceed by conducting trading simulations or by establishing and studying the behavior of people in artificial, competitive, market-like settings.

Behavioral finance[edit]

Behavioral finance studies how the psychology of investors or managers affects financial decisions and markets
^[39]
[40]
and is relevant when making a decision that can impact either negatively or positively on one of their areas. With more in-depth research into behavioral finance, it is possible to bridge what actually happens in financial markets with analysis based on financial theory.^[41]
Behavioral finance has grown over the last few decades to become an integral aspect of finance.^[42]

Behavioral finance includes such topics as:

1. Empirical studies that demonstrate significant deviations from classical theories;
2. Models of how psychology affects and impacts trading and prices;
3. Forecasting based on these methods;
4. Studies of experimental asset markets and the use of models to forecast experiments.

A strand of behavioral finance has been dubbed quantitative behavioral finance, which uses mathematical and statistical methodology to understand behavioral biases in conjunction with valuation.

Quantum finance[edit]

Quantum finance is an interdisciplinary research field, applying theories and methods developed by quantum physicists and economists in order to solve problems in finance. It is a branch of econophysics.
Finance theory is heavily based on financial instrument pricing such as stock option pricing. Many of the problems facing the finance community have no known analytical solution. As a result, numerical methods and computer simulations for solving these problems have proliferated. This research area is known as computational finance. Many computational finance problems have a high degree of computational complexity and are slow to converge to a solution on classical computers. In particular, when it comes to option pricing, there is additional complexity resulting from the need to respond to quickly changing markets. For example, in order to take advantage of inaccurately priced stock options, the computation must complete before the next change in the almost continuously changing stock market. As a result, the finance community is always looking for ways to overcome the resulting performance issues that arise when pricing options. This has led to research that applies alternative computing techniques to finance. Most commonly used quantum financial models are quantum continuous model, quantum binomial model, multi-step quantum binomial model etc.

History of finance[edit]

The origin of finance can be traced to the start of civilization. The earliest historical evidence of finance is dated to around 3000 BC. Banking originated in the Babylonian empire, where temples and palaces were used as safe places for the storage of valuables. Initially, the only valuable that could be deposited was grain, but cattle and precious materials were eventually included. During the same period, the Sumerian city of Uruk in Mesopotamia supported trade by lending as well as the use of interest. In Sumerian, «interest» was mas, which translates to «calf». In Greece and Egypt, the words used for interest, tokos and ms respectively, meant «to give birth». In these cultures, interest indicated a valuable increase, and seemed to consider it from the lender’s point of view.^[43] The Code of Hammurabi (1792–1750 BC) included laws governing banking operations. The Babylonians were accustomed to charging interest at the rate of 20 percent per annum.

Jews were not allowed to take interest from other Jews, but they were allowed to take interest from Gentiles, who had at that time no law forbidding them from practicing usury. As Gentiles took interest from Jews, the Torah considered it equitable that Jews should take interest from Gentiles. In Hebrew, interest is neshek.

By 1200 BC, cowrie shells were used as a form of money in China. By 640 BC, the Lydians had started to use coin money. Lydia was the first place where permanent retail shops opened. (Herodotus mentions the use of crude coins in Lydia in an earlier date, around 687 BC.)^[44][45]

The use of coins as a means of representing money began in the years between 600 and 570 BCE. Cities under the Greek empire, such as Aegina (595 BCE), Athens (575 BCE), and Corinth (570 BCE), started to mint their own coins. In the Roman Republic, interest was outlawed altogether by the Lex Genucia reforms. Under Julius Caesar, a ceiling on interest rates of 12% was set, and later under Justinian it was lowered even further to between 4% and 8%.^[46]

It’s said Belgium is the place where the first exchange happened back in approximately 1531.^[47] Since, popular exchanges such as
the London Stock Exchange (founded in 1773) and the New York Stock Exchange (founded in 1793) were created.^[48][49]

See also[edit]

• Outline of finance
• Financial crisis of 2007–2010

Notes[edit]

References[edit]

Further reading[edit]

• Graham, Benjamin; Jason Zweig (2003-07-08) [1949]. The Intelligent Investor. Warren E. Buffett (collaborator) (2003 ed.). HarperCollins. front cover. ISBN 0-06-055566-1.
• Graham, B. and Dodd, D. and Dodd, D.L.F. (1934). Security Analysis: The Classic 1934 Edition. McGraw-Hill Education. ISBN 978-0-070-24496-2. LCCN 34023635.{{cite book}}: CS1 maint: multiple names: authors list (link)
• Rich Dad Poor Dad: What the Rich Teach Their Kids About Money That the Poor and Middle Class Do Not!, by Robert Kiyosaki and Sharon Lechter. Warner Business Books, 2000. ISBN 0-446-67745-0
• Bogle, John Bogle (2007). The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns. John Wiley and Sons. pp. 216. ISBN 9780470102107.
• Buffett, W. and Cunningham, L.A. (2009). The Essays of Warren Buffett: Lessons for Investors and Managers. John Wiley & Sons (Asia) Pte Limited. ISBN 978-0-470-82441-2.{{cite book}}: CS1 maint: multiple names: authors list (link)
• Stanley, Thomas J. and Danko, W.D. (1998). The Millionaire Next Door. Gallery Books. ISBN 978-0-671-01520-6. LCCN 98046515.{{cite book}}: CS1 maint: multiple names: authors list (link)
• Soros, George (1988). The Alchemy of Finance: Reading the Mind of the Market. A Touchstone book. Simon & Schuster. ISBN 978-0-671-66238-7. LCCN 87004745.
• Fisher, Philip Arthur (1996). Common Stocks and Uncommon Profits and Other Writings. Wiley Investment Classics. Wiley. ISBN 978-0-471-11927-2. LCCN 95051449.

External links[edit]

• Finance Definition — Investopedia
• Finance Definition — Corporate Finance Institute
• Hypertextual Finance Glossary (Campbell Harvey)
• Corporate finance resources (Aswath Damodaran)
• Financial management resources (James Van Horne)
• Financial mathematics, derivatives, and risk management resources (Don Chance)
• Personal finance resources (Financial Literacy and Education Commission, mymoney.gov)
• Public finance resources (Governance and Social Development Resource Centre, gsdrc.org)

What Is Finance?

Finance is a term for matters regarding the management, creation, and study of money and investments. It involves the use of credit and debt, securities, and investment to finance current projects using future income flows. Because of this temporal aspect, finance is closely linked to the time value of money, interest rates, and other related topics.

Finance can be broadly divided into three categories:

• Public finance
• Corporate finance
• Personal finance

There are many other specific categories, such as behavioral finance, which seeks to identify the cognitive (e.g., emotional, social, and psychological) reasons behind financial decisions.

Understanding Finance

«Finance» is typically broken down into three broad categories: Public finance includes tax systems, government expenditures, budget procedures, stabilization policy and instruments, debt issues, and other government concerns. Corporate finance involves managing assets, liabilities, revenues, and debts for a business. Personal finance defines all financial decisions and activities of an individual or household, including budgeting, insurance, mortgage planning, savings, and retirement planning.

History of Finance

Finance, as a study of theory and practice distinct from the field of economics, arose in the 1940s and 1950s with the works of Harry Markowitz, William F. Sharpe, Fischer Black, and Myron Scholes, to name just a few. Particular realms of finance—such as banking, lending, and investing, of course, money itself—have been around since the dawn of civilization in some form or another.

The financial transactions of the early Sumerians were formalized in the Babylonian Code of Hammurabi (circa 1800 BC). This set of rules regulated ownership or rental of land, employment of agricultural labor, and credit. Yes, there were loans back then, and yes, interest was charged on them—rates varied depending on whether you were borrowing grain or silver.

By 1200 BC, cowrie shells were used as a form of money in China. Coined money was introduced in the first millennium BC. King Croesus of Lydia (now Turkey) was one of the first to strike and circulate gold coins around 564 BC—hence the expression, “rich as Croesus.”

In ancient Rome, coins were stored in the basement of temples as priests or temple workers were considered the most honest, devout, and safest to safeguard assets. Temples also loaned money, acting as financial centers of major cities.

Early Stocks, Bonds, and Options

Belgium claims to be home to the first exchange, with an exchange in Antwerp dating back to 1531. During the 16th century, the East India Company became the first publicly-traded company as it issued stock and paid dividends on proceeds from its voyages. The London Stock Exchange was created in 1773 and was followed by the New York Stock Exchange less than 20 years later.

The earliest recorded bond dates back to 2400 B.C., as a stone tablet recorded debt obligations that guaranteed repayment of grain. During the Middle Ages, governments began issuing debts to fund war efforts. In the 17th century, the Bank of England was created to finance the British Navy. The United States also began issuing Treasury bonds to support the Revolutionary War.

Options contracts can be found dating back to the Bible. In Genesis 29, Laban offers Jacob the option to marry his daughter in exchange for seven years of labor. However, this example demonstrates the difficulty of preserving obligations, as Laban reneged the agreement after Jacob’s labor was complete.

In Aristotle’s 4th-century philosophical work Politics, the early practice of options is outlined through an anecdote by the philosopher Thales. Believing a great future harvest of olives in the coming year, Thales pre-emptively acquired the rights to all olive presses in Chios and Miletus. Regarding options on an exchange, both forward and options contracts were integrated into Amsterdam’s sophisticated clearing process by the mid-17th century.

Advances in Accounting

Compound interest—interest calculated not just on principal but on previously accrued interest—was known to ancient civilizations (the Babylonians had a phrase for “interest on interest,” which basically defines the concept). But it was not until medieval times that mathematicians started to analyze it in order to show how invested sums could mount up: One of the earliest and most important sources is the arithmetical manuscript written in 1202 by Leonardo Fibonacci of Pisa, known as Liber Abaci, which gives examples comparing compound and simple interest.

The first comprehensive treatise on book-keeping and accountancy, Luca Pacioli’s Summa de arithmetica, geometria, proportioni et proportionalita, was published in Venice in 1494. A book on accountancy and arithmetic written by William Colson appeared in 1612, containing the earliest tables of compound interest written in English. A year later, Richard Witt published his Arithmeticall Questions in London in 1613, and compound interest was thoroughly accepted.

Towards the end of the 17th century, in England and the Netherlands, interest calculations were combined with age-dependent survival rates to create the first life annuities.

Public Finance

The federal government helps prevent market failure by overseeing the allocation of resources, distribution of income, and stabilization of the economy. Regular funding for these programs is secured mostly through taxation. Borrowing from banks, insurance companies, and other governments and earning dividends from its companies also help finance the federal government.

State and local governments also receive grants and aid from the federal government. Other sources of public finance include user charges from ports, airport services, and other facilities; fines resulting from breaking laws; revenues from licenses and fees, such as for driving; and sales of government securities and bond issues.

Corporate Finance

Businesses obtain financing through a variety of means, ranging from equity investments to credit arrangements. A firm might take out a loan from a bank or arrange for a line of credit. Acquiring and managing debt properly can help a company expand and become more profitable.

Startups may receive capital from angel investors or venture capitalists in exchange for a percentage of ownership. If a company thrives and goes public, it will issue shares on a stock exchange; such initial public offerings (IPO) bring a great influx of cash into a firm. Established companies may sell additional shares or issue corporate bonds to raise money. Businesses may purchase dividend-paying stocks, blue-chip bonds, or interest-bearing bank certificates of deposits (CD); they may also buy other companies in an effort to boost revenue.

Recent examples of corporate financing include:

• Bausch & Lomb Corp’s initial public offering was initially filed on 1/13/2022 and officially sold shares in May 2022. The healthcare company generated $630 million of proceeds.
• Ford Motor Credit Company LLC managing outstanding notes to raise capital or extinguish debt to support Ford Motor Company.
• HomeLight’s blended financial approach of raising $115 million ($60 million by issuing additional equity and $55 million through debt financing). HomeLight used the additional capital to acquire lending start-up Accept.inc.

Personal Finance

Personal financial planning generally involves analyzing an individual’s or a family’s current financial position, predicting short-term, and long-term needs, and executing a plan to fulfill those needs within individual financial constraints. Personal finance depends largely on one’s earnings, living requirements, and individual goals and desires.

Matters of personal finance include but are not limited to, the purchasing of financial products for personal reasons, like credit cards; life and home insurance; mortgages; and retirement products. Personal banking (e.g., checking and savings accounts, IRAs, and 401(k) plans) is also considered a part of personal finance.

The most important aspects of personal finance include:

• Assessing the current financial status: expected cash flow, current savings, etc.
• Buying insurance to protect against risk and to ensure one’s material standing is secure
• Calculating and filing taxes
• Savings and investments
• Retirement planning

As a specialized field, personal finance is a recent development, though forms of it have been taught in universities and schools as «home economics» or «consumer economics» since the early 20^th century. The field was initially disregarded by male economists, as «home economics» appeared to be the purview of housewives. Recently, economists have repeatedly stressed widespread education in matters of personal finance as integral to the macro performance of the overall national economy.

Social Finance

Social finance typically refers to investments made in social enterprises including charitable organizations and some cooperatives. Rather than an outright donation, these investments take the form of equity or debt financing, in which the investor seeks both a financial reward as well as a social gain.

Modern forms of social finance also include some segments of microfinance, specifically loans to small business owners and entrepreneurs in less developed countries to enable their enterprises to grow. Lenders earn a return on their loans while simultaneously helping to improve individuals’ standard of living and to benefit the local society and economy.

Social impact bonds (also known as Pay for Success Bonds or social benefit bonds) are a specific type of instrument that acts as a contract with the public sector or local government. Repayment and return on investment are contingent upon the achievement of certain social outcomes and achievements.

Behavioral Finance

There was a time when theoretical and empirical evidence seemed to suggest that conventional financial theories were reasonably successful at predicting and explaining certain types of economic events. Nonetheless, as time went on, academics in the financial and economic realms detected anomalies and behaviors which occurred in the real world but could not be explained by any available theories.

It became increasingly clear that conventional theories could explain certain “idealized” events—but that the real world was, in fact, a great deal more messy and disorganized, and that market participants frequently behave in ways that are irrational, and thus difficult to predict according to those models.

As a result, academics began to turn to cognitive psychology in order to account for irrational and illogical behaviors which are unexplained by modern financial theory. Behavioral science is the field that was born out of these efforts; it seeks to explain our actions, whereas modern finance seeks to explain the actions of the idealized “economic man” (Homo economicus).

Behavioral finance, a sub-field of behavioral economics, proposes psychology-based theories to explain financial anomalies, such as severe rises or falls in stock price. The purpose is to identify and understand why people make certain financial choices. Within behavioral finance, it is assumed the information structure and the characteristics of market participants systematically influence individuals’ investment decisions as well as market outcomes.

Daniel Kahneman and Amos Tversky, who began to collaborate in the late 1960s, are considered by many to be the fathers of behavioral finance. Joining them later was Richard Thaler, who combined economics and finance with elements of psychology in order to develop concepts like mental accounting, the endowment effect, and other biases that have an impact on people’s behavior.

Tenets of Behavioral Finance

Behavioral finance encompasses many concepts, but four are key: mental accounting, herd behavior, anchoring, and high self-rating and overconfidence. 

Mental accounting refers to the propensity for people to allocate money for specific purposes based on miscellaneous subjective criteria, including the source of the money and the intended use for each account. The theory of mental accounting suggests that individuals are likely to assign different functions to each asset group or account, the result of which can be an illogical, even detrimental, set of behaviors. For instance, some people keep a special “money jar” set aside for a vacation or a new home while at the same time carrying substantial credit card debt.

Herd behavior states that people tend to mimic the financial behaviors of the majority, or herd, whether those actions are rational or irrational. In many cases, herd behavior is a set of decisions and actions that an individual would not necessarily make on his or her own, but which seem to have legitimacy because «everyone’s doing it.» Herd behavior often is considered a major cause of financial panics and stock market crashes. 

Anchoring refers to attaching spending to a certain reference point or level, even though it may have no logical relevance to the decision at hand. One common example of “anchoring” is the conventional wisdom that a diamond engagement ring should cost about two months’ worth of salary. Another might be buying a stock that briefly rose from trading around $65 to hit $80 and then fell back to $65, out of a sense that it’s now a bargain (anchoring your strategy at that $80 price). While that could be true, it’s more likely that the $80 figure was an anomaly, and $65 is the true value of the shares.

High self-rating refers to a person’s tendency to rank him/herself better than others or higher than an average person. For example, an investor may think that he is an investment guru when his investments perform optimally, blocking out the investments that are performing poorly. High self-rating goes hand-in-hand with overconfidence, which reflects the tendency to overestimate or exaggerate one’s ability to successfully perform a given task. Overconfidence can be harmful to an investor’s ability to pick stocks, for example. A 1998 study entitled «Volume, Volatility, Price, and Profit When All Traders Are Above Average«, by researcher Terrance Odean found that overconfident investors typically conducted more trades as compared with their less-confident counterparts—and these trades actually produced yields significantly lower than the market.

Finance vs. Economics

Economics and finance are interrelated, informing and influencing each other. Investors care about economic data because they also influence the markets to a great degree. It’s important for investors to avoid «either/or» arguments regarding economics and finance; both are important and have valid applications.

In general, the focus of economics—especially macroeconomics—tends to be a bigger picture in nature, such as how a country, region, or market is performing. Economics also can focus on public policy, while the focus of finance is more individual, company- or industry-specific.

Microeconomics explains what to expect if certain conditions change on the industry, firm, or individual level. If a manufacturer raises the prices of cars, microeconomics says consumers will tend to buy fewer than before. If a major copper mine collapses in South America, the price of copper will tend to increase, because supply is restricted.

Finance also focuses on how companies and investors evaluate risk and return. Historically, economics has been more theoretical and finance more practical, but in the last 20 years, the distinction has become much less pronounced.

Is Finance an Art or a Science?

The short answer to this question is both.

Finance As a Science

Finance, as a field of study and an area of business, definitely has strong roots in related-scientific areas, such as statistics and mathematics. Furthermore, many modern financial theories resemble scientific or mathematical formulas.

However, there is no denying the fact that the financial industry also includes non-scientific elements that liken it to an art. For example, it has been discovered that human emotions (and decisions made because of them) play a large role in many aspects of the financial world.

Modern financial theories, such as the Black Scholes model, draw heavily on the laws of statistics and mathematics found in science; their very creation would have been impossible if science hadn’t laid the initial groundwork. Also, theoretical constructs, such as the capital asset pricing model (CAPM) and the efficient market hypothesis (EMH), attempt to logically explain the behavior of the stock market in an emotionless, completely rational manner, wholly ignoring elements such as market sentiment and investor sentiment.

Finance As an Art

Still, while these and other academic advancements have greatly improved the day-to-day operations of the financial markets, history is rife with examples that seem to contradict the notion that finance behaves according to rational scientific laws. For example, stock market disasters, such as the October 1987 crash (Black Monday), which saw the Dow Jones Industrial Average (DJIA) fall 22%, and the great 1929 stock market crash beginning on Black Thursday (Oct. 24, 1929), are not suitably explained by scientific theories such as the EMH. The human element of fear also played a part (the reason a dramatic fall in the stock market is often called a «panic»).

In addition, the track records of investors have shown that markets are not entirely efficient and, therefore, not entirely scientific. Studies have shown that investor sentiment appears to be mildly influenced by weather, with the overall market generally becoming more bullish when the weather is predominantly sunny. Other phenomena include the January effect, the pattern of stock prices falling near the end of one calendar year and rising at the beginning of the next.

The Bottom Line

Finance is a broad term that describes a variety of activities. But basically, they all boil down to the practice of managing money—getting, spending, and everything in between, from borrowing to investing. Along with activities, finance also refers to the tools and instruments people use in relation to money, and the systems and institutions through which activities occur.

Finance can involve something as large as a country’s trade deficit or as small as the dollar bills in a person’s wallet. But without it, very little could function—neither an individual household, nor a corporation, nor a society.

When you hear or see the word finance, what comes to your mind first? Let me guess, money, business, accounting, investment, capital, assets, liabilities, etc. Well, the truth is you are not wrong. Finance is very vast, but it still cuts across all these terms and more.

This article encompasses everything you need to know about finance, which is not limited to definitions, types, importance, and finance management.

Below is a proper definition of finance to help you understand it better.

People finance is the study of how money works, and how to tackle money-related risks, which will eventually lead to better forecasting and the right way to invest it.

We can also define finance as the management of funds, transaction with money, and how money can be acquired.

Here are a few basic terms;

• Investment
• Budget
• Funds
• Revenue
• Capital
• Insurance
• Account
• Net profit

Types of Finance

All institutions need funding needs and are directly involved with money, which is why it has three types of Finance.

There are three basic categories of Finance;

1. Personal Finance
2. Public Finance
3. Cooperate Finance

#1 Personal Finance

Just like the definition of Finance, Personal Finance involves private funds management, i.e. families and individuals. It means financial analysis of an individual or family current financial situation. This analysis will include knowing the financial goals of the individual or family. And then analyzing the financial decisions they have made in the past, which includes budgets, savings, spending, insurance, investments.

For example, suppose Williams decides to create a family budget to help curtail expenditure, it means there will be proper financial management in the family. 

However, personal finance strategies are dependent on what the individual or family earns and their long-term goals. One exciting thing about this type of finance is that everybody is directly involved. This is where financial literacy comes in handy.

#2 Public Finance

Public Finance involves the role of government in Finance. The way government manages revenue and expenditure. Public finance cuts across every financial decision made by the government and why they made them.

For instance, if a country decides to practice a closed form of economy, it means that the finance professionals have previously analyzed the financial benefits of a closed economy and how it can make more positive impacts in the country.

Additionally, if farmers get federal government grants, it will be because the financial analysts have conducted a thorough analysis, including the long-term results of providing that grant. One good thing about public finance is that it keeps the government accountable for how revenues and funds are managed.

Some basic terms in public Finance;

• Tax
• National Debt
• Expenditures
• National budget

#3 Corporate Finance (Business)

Corporate finance is the type of finance that deals with the funding and capital sources of a corporation. It has to do with all the financial activities involved in running a corporation. Most of the time, it is a department that oversees all financial activities in a firm. They make decisions that range from how to invest, how much to invest, to how shareholders receive dividends.

Corporate finance has a primary goal of maximizing shareholder value. It can be done by implementing financial strategies which have been initially planned.

Finance Management

Finance management is essential for every organization. It is the process of strategically planning the management of financial resources in an organization. This process of controlling and monitoring Funds is to enable the organization to achieve its goals and objective.

However, in financial management, the general principles of management are applied. Any firm with proper management of Finance will function efficiently. That is to say that organizations without proper finance management will face a bunch of problems that will eventually lead to their doom if not adequately corrected.

Read Also: 5 top management consulting services in high demand

Objectives of Finance Management

1. To make sure investments are made at an adequate rate and in the right venture.
2. Oversee the financial matters to ensure shareholders have their returns which means making a reasonable profit.
3. Maintaining sufficient cash flow.
4. Regulating prices and trying to reduce cost in the best possible way.
5. To ensure funds are used smartly and make sure all funds are correctly accounted for.

Importance of Finance

The importance of Finance cannot be overemphasized. No institution can function adequately without Finance, yes! that how important it is. Finance can make or break an institution. Imagine a family that doesn’t know how much they earn versus spend, a country without investments, or a business firm without proper accounting and finance management. Just imagination of it alone seems impossible.

I will break this down in three different categories, almost based on the types of finance above. Importance of Finance in;

• Families and Individuals.
• Countries
• Business.

Families and Individuals

• To meet financial needs.

Financial security should be the goal of every family, however, without proper planning and management, that cannot happen. A family that creates a family budget, invests wisely, protects their property via insurance, and even has a retirement plan has created financial security. This family is financially secure and can meet the needs of its members.

• Scale of preference

It helps families and individuals become conscious of spending habits. They can make their preference list and know what they need more than the others. A scale of preference will help them not spend beyond what they plan.

• Increases financial understanding

Have you ever felt like you don’t understand how your earnings were spent? Like you feel robbed when you are very sure you did the robbery. Proper finance management can make you avoid all these feelings. It keeps you accountable to yourself. It might not be something you will understand in a day, but with time and effort, you will be able to get better every day.

• Manage Debts properly

Being in debt is not a problem, but the ability to manage the debt is where the trouble begins. Financial knowledge will help you make a proper analysis and informed decisions concerning your debt. How you handle debt says a lot about what your financial future will look like. Finance plays a significant role in individual and family life.

Business and firms

1. Generating funds

Funds and business sound almost like the same thing. because businesses need funds to function. The process of making a capital investment in a company is called finance. Another crucial role that finance plays in the income generation of a business is how to set up the business strategy to generate income.

Example;

Mr. Peters just launched his business, and in as much as he hasn’t started getting returns. Finance has already played a huge role. From marketing strategy to the kind of people he would employ, to the kind of raw materials he bought and of cause how he insures them. All these steps took strategic planning of financial professionals or literates.

2. Manage cash flow

Managing cash flow in a business is a big deal because it can make or break that business. So proper financial skill is always needed for it. Adequate accounting of revenue includes, how workers are paid and how much to reinvest. Finance influences every decision on how money moves in and out of businesses to create more returns. That is to say that proper finance management can take care of the cash flow in a business.

• It helps to sustain economic downturns well

In every business, there is always a time when the economic activities will have a general downturn. No business goes a hundred percent smooth all year long. But the ability to manage this downturn and bounce back is where finance plays its huge role in business again. Financial literacy will help you understand the economic downturn properly and the implications it has on your business. This is the first step to solving the problem because you know when you need the help of a professional or the type of business consultant you need.

• It helps a business set more realistic goals

Every business has long-term and short-term goals. These goals are not something set out of random motivation or wants. To set realistic goals, there has to be a good overview of the business, both past and present. This will help not just to set goals but to set realistic and attainable goals. Keeping records of everything happening in the industry helps set goals based on informed decisions backed with data rather than random plans.

In government

• Economic growth

A sustainable high economic growth rate is the goal of almost every country. However, for it to be achieved, the government needs to use some financial tools. These tools will increase aggregate demand and supply, which directly leads to economic growth. Some of these tools include taxes, subsidies, public expenditure, and public debt. Etc.

• Price stability

Inflation and deflation are two major determinants of price instability in a country. So in the case of inflation or deflation in an economy, the government uses financial strategies to reduce the amount of money in circulation, and that will reduce the inflation rate.

Example,

If ”Country A” has inflation, the government will decide to increase interest rates, which will decrease the demand for a loan and in turn reduce the amount of money in circulation.

1. Proper allocation of resources

Allocation of resources by the government requires some level of financial experts. The government monitors the resources (human-made and financial) with this, it knows the kind of production to impose taxes on and the ones to subsidize. Meanwhile, financial management in a country needs experts to make informed and effective decisions like this.

2. Import and export regulation

When the imports in a country become more than the exports, the government tries to regulate by using some financial strategies. Most of the time, they increase the import duty to discourage importation. In the same hand, decrease the export duty to encourage importation.

In conclusion, now you have come to understand that the importance of Finance goes across all types of Finance which directly affects all intuitions (everybody). Finance is an essential part of practical living; this is an indisputable fact.

What is the Aim of Finance?

The main purpose of the finance department is to make accurate assessments of the business’s funding requirements and to secure the necessary cash in a timely manner. When it comes to satisfying the demands of the company, time is also crucial.

What are Sources of Finance?

A firm can obtain funding from a variety of external sources, including family and friends, bank loans and overdrafts, venture capitalists and business angels, new partners, share issuance, trade credit, leasing, hire buy, and grants from the government.

What is Short Term Finance?

Short term finance refers to funding requirements for a brief period, typically less than one year. It is also known as working capital financing in the business world. This sort of finance is typically required because to an inconsistent cash flow into the business, seasonal business patterns, etc.

What are the Two Sides of Finance?

It has both buy-side and sell-side. Buy-Side refers to the segment of the financial market that purchases and invests huge quantities of securities for the goal of money or fund management. Sell-Side is the opposite side of the financial market that deals with the creation, promotion, and sale of publicly traded securities.

What is the Difference Between Accounting and Finance?

The major distinction between finance and accounting is that those working in finance are responsible for overseeing and planning the organization’s financial transactions, while accountants are responsible for keeping track of and reporting on those transactions.

Why do we need Finance?

Organizations can benefit financially in a variety of ways. The goal may be to increase liquidity, invest in growth, acquire assets, restock, staff up, or restructure debt through refinancing.

What do you Study in Finance?

Those who have earned a degree in financial management have specialised knowledge in areas such as financial analysis and forecasting, portfolio management, cash management, international finance, and risk management.

Free recommended PDFs on Finance

1. Basics of Finance
2. Introduction to finance by J.wang
3. Essential Finance by Nigel Gibson

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FAQ

Whats does finance mean?

We can also define finance as the management of funds, transaction with money, and how money can be acquired.

What are the 4 types of finance?

All institutions need funding needs and are directly involved with money, which is why it has three types of Finance.

There are three basic categories of Finance;

1. Personal Finance
2. Public Finance
3. Cooperate Finance

Finance is an extensive term used to describe money management and the process involved in acquiring funds. Finance embodies banking, credit, investment, assets, and debts that constitute financial systems. The financial system comprises three main subcategories: personal finance (individual), corporate finance (business), and public finance (government). The financial sector is the main driving force of a nation’s economy.

Meaning of Finance

According to the dictionary, finance is described as managing a huge sum of money, mostly by governments or large companies. As a verb, finance is the act of providing funds for an enterprise or a person. Finance originates from the French word “Finer,” which means “to end” and “to pay.” “To end” in this perspective means to settle a dispute or debt that is due. Adapted into English, finance means the management of money.

Definition of Finance

Finance is closely related to money since it’s a means of exchange. The financial sector drives the economic, social, and administrative industries. From savings to financial institutions and governments’ taxes to share capitals, the finance function can be seen in all activities and processes.

Below are some of the standard definitions of finance:

• In economics, finance has termed a branch of economics that deals with resource allocation, management, investment, and acquisition.
• In business, finance is defined as raising money by issuing and selling equity or debt.
• In science, finance entails the creation, management, and study of money. It also encompasses banking, credits, liabilities, assets, and investments.
• Experts describe finance as the allocation of assets by people overtime in certain and uncertain conditions. They believe assets are priced according to their risk level and return rate.
• Based on the systems view, finance comprises financial systems such as the public, private, and government institutions. It’s also the study of finance and financial instruments.

The finance function deals with the various activities, functions, and processes associated with financing. It incorporates budgetary functions, cash flow, and cash management, risk and return management, among other functions.

Terms Associated with the Financial Industry

There is a broad range of terms and topics associated with financial systems. Here is a list of some of which you’re most likely to come across in the industry:

• Risk and return
• Profit
• Financial statements
• Shareholders
• Behavioral finance
• Cost of capital
• Cash flow
• Interest rates
• Dividends
• Yield

Features of Finance

Every shareholder wants to make profits from business, and this is usually estimated in the form of stocks by the organization. How can one possibly achieve this financial goal? Some features distinguish business finance from other branches of finance. Some of these features are explained below:

Investment Opportunities

Investment is the utilization of money to make returns or profit. Purchasing land or home, investing in a business idea, and acquiring financial securities like bonds or shares are investment opportunities in the market one can delve into. These investment opportunities can generate wealth with expected returns in the future. The returns can change based on economic factors.

Internal Control System

Internal controls are a set of rules, regulations, and procedures exercised on the inception of a company to curb fraud, thus promoting transparency and financial information integrity. Internal controls also help improve accuracy and early financial reporting, thereby enhancing operational efficiency. These rules and regulations are subjected to change over time based on business requirements. They’re often monitored for compliance and consistency. The internal control system is composed of a controlled environment, risk assessment, control activities, information and communication, and monitoring.

Allocation and Utilization of Funds

Finance has to do with acquiring, allocating, and utilizing funds. A business must ascertain that adequate funds are made available by the right sources at the appropriate time. The business needs to choose the method by which it will raise funds through securities or bank loans. After acquiring the funds, there will be a need to allocate the funds to various projects and ventures. Every business aims to make profits, dependent on the efficient and effective use of allocated funds. Appropriate use of funds depends on proper investment decisions, control, management strategies, and policies.

Channeling Funds

It’s a known fact that the financial system is a crucial aspect of every economy. From people who have saved many funds by spending less to short of funds as a result of their spending habits, this financial sector facilitates the channeling of funds.

Diversify your Investment

Another feature of finance is the diversification of investment. One great way to decrease risk and increase profits and earnings is by diversifying your investment. Many experts suggest one to diversify in many areas as investing funds in a particular source increases risk. To diversify your investment, you can allocate 60% in property and assets, 20% in equity funds, and 20% in mutual funds.

Make Financial Decisions

Decision making is a critical element of financing. Having good financial planning skills without making decisions will do you no good. Financial planning, management plans, and decision making are expedient in business as they are instrumental in making good investment returns.

Financial Management

The financial objective of most organizations is the maximization of profits and economic welfare. Any company’s financial scope is to ensure adequate funds are consistently available for the business’s running. Another objective is that an optimum return rate is provided to the suppliers of capital. Following the liquidity, profitability, and limiting risk policy enables businesses to utilize capital and resources efficiently. Financing leads to an explicit system of internal controls, investment, and management.

Careers in Finance

The meaning, definition, and finance features would be incomplete without examining the career options available in the financial industry. Here is a list of some of the career paths in finance:

• Commercial banking
• Corporate finance
• Personal banking
• Financial planning
• Investment banking
• Insurance
• Equity research
• Wealth management
• Mortgages/lending
• Auditing
• Accounting
• Treasury

1. Commercial Banking

Commercial banking offers a broad range of financial services like checking accounts, saving accounts, and loan facilities to individuals and businesses. The retail banking sector’s popular positions are credit analyst, loan officer, bank teller, mortgage banker, branch manager, and trust officer. Commercial banks create room for growth as workers take up higher roles with decent pay packages.

Positions available in commercial banking:

Credit Analyst

A credit analyst assesses companies and individuals’ financial data and statements to ascertain if they’ll be able to fulfill their financial obligations when offered loan services.

Loan Officer

A loan officer refers to a specialist or representative of the financial institution that inspects, approves, and recommends individuals’ loans. Loan officers are well acquainted with the different types of loans, so they advise loan applicants on the type of loan to go for and their eligibility.

Bank Teller

Also known as a bank cashier or customer representative, a bank teller controls financial transactions such as deposits, cash transfers, and withdrawals. Bank tellers also issue cheques and money orders, collect payments and promote some of the bank’s products like mortgages or particular savings account. They may also be assigned to count the cash, do paperwork, resolve customer issues, and balance vaults.

Mortgage Banker

A mortgage banker is a person or entity that promotes mortgages. The individual invests in mortgages by funding or borrowing funds from a loan originator. Like a loan adviser, a mortgage banker helps the borrower and loan applicants make the right choice of loan options. The mortgage banker may choose to sell or retain the mortgage after it has been originated. They liaise with realtors and people seeking loans through the mortgage procedures. 

Trust Officer

A Trust officer or trust administrator is a bank professional who offers expertise and act as an advisor on trust and estate matters. The job duties include communication with clients, calculating disbursements, handle business accounts, among others. Trust officers are also concerned with administrative duties. They must guarantee that all accounts comply with the banking requirements of the state and federal sectors.

2. Corporate Finance

Corporate finance focuses on the management of a company’s financial activities. This deals with the raising of funds and channeling of these funds to maximize profitability for the company.

Corporate finance includes the following:

• Risk management and tax considerations
• Analysis of capital budget
• Public issuance of stock and stock exchange listing
• Stock acquisition and investment in assets
• Pinpointing essential objectives, opportunities, and limitations
• Recognizing sources of funds
• Using standard business valuation processes.
• Controlling unallocated profits for distribution among shareholders and future investment
• Common openings in corporate finance include treasurer, financial analyst, chief financial officer, tax manager, internal auditor, and others.

Let’s consider each of these roles:

Treasurer

The finance expert supervises every aspect of financial management by working concertedly with other members to evaluate and monitor its funds. Treasurers facilitate fundraising, budgeting, book-keeping, and financial reporting.

Financial Analyst

Financial analysts assess and analyze financial data so businesses can pinpoint opportunities and make better decisions. A financial analyst’s duties include financial forecasting, analyzing and translating data, creating automated reporting instruments, and others. 

Chief Financial Officer

Similar to a treasurer, the chief financial officer oversees the financial activities of a company. The CFO has an immense role in the overall success of an organization. A CFO is a highest-ranking position in the financial industry. They often work closely with the Chief Executive Officer (CEO) to execute the company’s strategic initiatives. The CFO’s duties encompass the monitoring of cash flow, overseeing all finance personnel, evaluating the company’s strengths (investments) and weaknesses (liabilities), thus proffering solutions.

Tax Manager

Tax managers are majorly concerned with preparing and developing business tax strategies in strict adherence to federal/law tax laws and policies. Though a tax manager’s duties vary based on the size of the organization and business location, a tax manager performs tax documentation, implements solutions to tax problems, and provides a wide range of tax services that comply with laws and regulations.

3. Personal Banking

Personal banking deals with the financial decisions of an individual, also relative to savings and investments. These decisions may encompass budgeting, monetary resources, among others.

Personal finance includes the following:

• Tax Management
• Retirement Plans
• Wealth Generation
• Long Term Expenditure or Purchase
• Loan or Debt Payment
• Investment Goals

4. Investment Banking

This is a top financial career in the industry. Investment banking deals with brokering primary transactions, merging, and issuance of securities like stocks, equities, and bonds for purchase by investors in the marketplace. Investment banks help raise capital for corporations, governments, and institutions. An investment banking career is quite competitive, requiring the mastery of financial skills with excellent negotiation skills and confidence. There are many divisions that an investment banker can work in. They can work as a qualitative research analyst, trading securities in the market.

Qualitative Research Analyst

Qualitative research analysts are trained individuals who handle securities and assets. They’re often called investment or securities analysts. Research analysts make inquiries, analyze and review policies, facts, and theories that concern financial institutions. After conducting research, the research analyst reports the public records of companies’ securities, also recommending the “buy,” “sell,” or “hold” policy.

5. Insurance

Insurance safeguards individuals and businesses from potential risks and circumstances. Popular roles in insurance include insurance sales representative, customer service specialist or, actualist calculating risks and standard rate based on the probabilities gathered from financial trends.

Insurance Sales Representative

An insurance sales representative promotes insurance policies and makes contact with potential clients to meet their insurance needs. He or she recommends insurance policies to clients and initiate effective marketing strategies to boost insurance sale. Insurance sales representatives collect data from clients on their policy needs, report to shareholders on business strategies, and create awareness of sales and transactions.

Customer Service Specialist

Insurance customer service specialist provides clients with information about the insurance company’s products and services. They resolve customers’ complaints, respond to inquiries, attend to correspondences and record customer interactions. They recommend new products and services to clients and work with other departments to provide support to clients.

Actualist

Actualist regulates financial risks associated with an investment, insurance, and other ventures. Many public, private, investment and insurance companies employ the services of actuaries. As a business, most insurance companies want to operate low-risk policies. Though many of their policies revolve around life expectancy, they also offer policies on property and liability.

6. Equity Research

Another top career in finance is equity research. Equity research deals with the in-depth analysis of a company’s stock, valuation, and financial modeling. An equity research analyst helps investors make crucial financial decisions, most especially in investment. The analyst suggests the investment to buy, hold or sell to investors. They also make research reports and projections. To excel in this field, you’ll need to have a great deal of patience and an increased ethical values level. 

7. Wealth Management

Relative to investment banking, wealth management focuses on providing financial services to affluent and less wealthy people. Wealth management is simply defined as money management. Wealth managers earn money by charging fees for services rendered. In wealth management, clients can operate a brokerage account with access to tax planning, estate, and retirement plan.

8. Mortgages/Lending

A mortgage is an act of offering loan services to individuals who want to buy a house or property. The borrower gets to repay the loan with interest over the years till he or she gains ownership of the property. Mortgage brokers pose as middlemen between financial institutions and potential homeowners. Clients are offered loan options from numerous lenders. The clients compare loans and draw out financial and employment details from buyers. Mortgage brokers guide clients on their loan options and ensure the process conforms to rules and regulations.

9. Auditing

Auditing refers to the inspection, evaluation, review, and financial analysis to draw out financial statements. This financial system helps in the management of funds, reduces cost, increases earnings and business decision-making. It checks that individuals and companies comply with tax codes and financial policies. Auditors can work in the government sector, financial organizations, and universities. There are different types of auditors: internal auditor, external auditor, government auditor, and forensic auditor.

Internal Auditor

An internal auditor is a trained person who independently assesses a company’s operations or internal control system. Internal auditors collate data and information about the financial activities of the organization. They pinpoint problems and take corrective measures before an external auditor discovers the irregularities and issues. These auditors gather, evaluate and check all company records to ensure they comply with the set down rules and regulations. They may perform valuation to decrease management costs, maximize resources and limit risk. Upon completing the audit, the internal auditor will submit a final report to the senior executives for recommendations.

External Auditor

External auditors usually work for external audit firms. They conduct audits following certain rules and regulations. External audits are often conducted once a year whereby the auditor present an independent report with an objective opinion. The external auditor may make inquiries from the internal auditor without having their reports influenced by them. He or she may need to work closely with other departments if he’s conducting audits on the departments.

Government Auditors

Government auditors analyze and scrutinize financial records of government agencies, private companies, and businesses subjected to government regulations and taxation. These auditors ensure that revenues are spent appropriately and efficiently based on the given laws and rules. They detect fraudulent activities, analyze financial records, examine reports, review internal controls, etc.

Forensic Auditor

Forensic auditors are specialized in crimes and mostly work with law enforcement agencies. Though forensic audit and external audit seem alike, a forensic audit is more specific and is usually conducted as part of the legal process. In cases of embezzlement or fraud, the audit reports are often presented as evidence. Forensic auditors can tell when there’s a fraud, investigate the period and how it was carried out. They gather tangible evidence that supports their report, which will also be presented in court. As experts, they recommend precautionary measures for fraud. To become a forensic auditor, individuals must have a vast knowledge of the law, accounting, machine learning, investigative auditing, criminology, data analytics, and computer science.

10. Accounting

Accounting entails budgeting, daily financial reporting, and data analysis for the growth of any company. Accounting professionals can work as financial managers, auditors, financial accountants, and management accountants.

Financial Managers

Financial managers oversee the finances of an organization. They work alongside executives in decision-making for the benefit of the company. Financial managers analyze data, produce financial reports, monitor financial trends and opportunities that will maximize profits. A financial manager should have a broad knowledge of tax laws, regulations and topics centered on their field. Healthcare financial managers are expected to be knowledgeable about healthcare finance. Financial managers can work in both the public and private sectors. Their services may be required in multinational companies, universities, manufacturing industries, among others.

Financial Accountants

A Financial accountant monitors the company’s financial activities, be it corporate, public, or private. They collect data, prepare monthly reports, and forecast future projections. Furthermore, they give comprehensive financial statements and information to various departments for budgeting and investment purposes.

Management Accountants

Also referred to as corporate accountants, management accountants are the key determinant of a successful company. They carry out a series of tasks like risk management, managing the company’s investment, handling taxes, long and short-term planning. They also analyze to make budgeting plans and forecast future needs before presenting to the top managers for prompt decision-making. To be successful as a management accountant, the individual will need to be good in numbers, math, and business methods.

11. Treasury

Treasury deals with the financial capabilities of any company for the successful and smooth running of the business. It gives a definite future prediction and forecasts the needed funds for the company. Treasury professionals have diversified career opportunities they can delve into. They can work in large or small organizations across the globe. Regardless of the sector, these professionals can work anywhere.

Also read Highest Paying Jobs in Finance

Finance refers to activities related to the exchange of certain capital assets between individuals, companies or states. The term also relates to the uncertainties and risks that these transactions carry. Finance is one of the branches of the economy.

The term is different from ‘economics.’ Economics also includes the production, consumption, and distribution of services or goods.

Economics encompasses several fields, including finance, business, government, law, social institutions, and science. It also includes education and politics.

According to Tricky Finance:

“Finance is all about the creation, management, and study of money, investments, assets and liabilities, banking, and credit.”

Put simply; the term relates to matters of money and the markets.

The word in its plural form, i.e., finances, often refers to how somebody is managing financially. If I want to know how you’re coping financially, for example, I might ask “How are your finances?”

Finance is also the science that describes the management, study, and creation of liquidity, credit investment, banking, assets, and liabilities.

It also includes cash flow management, paying bills, auditing, and preparing financial statements. Additionally, it includes the financial systems in both the public (government) and private sectors.

The Financial Times glossary of terms has the following definition of the word:

“Money provided or lent, for example by a bank for investment (when money is put into buildings, equipment, etc., to produce goods and services) or consumption (when people buy goods and services),” or “the management of money by countries, organizations, and people,” or “the study of the management and use of money.”

Finance – three broad categories

We can divide the term into three categories:

Corporate finance

The study of the sources of money, how to use the money that has been raised so that shareholders’ wealth may be maximized.

Public finance

The study of the government’s role in the economy. It includes the collection of taxes, the spending of that revenue, as well as debt and borrowing.

Personal finance

This term refers to the financial activities and decisions of the individual or household. It typically includes mortgages, debt servicing, investing, savings, insurance, and budgeting. It also includes analyzing one’s financial position as well as forecasting short- and long-term needs.

Financial department

The financial department manages the organization’s money. Its functions include:

• Financial planning, which involves among other things preparing and planning internal financial information for each department.
• Financial organization.
• Auditing.
• Accounting.
• Controlling finances.
• Keeping and maintaining financial records, including sales and expenditure figures.
• Producing financial statements, including trading and profit & loss. It also includes the balance sheet.
• Payments – paying creditors (bills/invoices) and employees. The finance department is responsible for the management of the organization’s cash-flow and has to make sure there are sufficient funds available to cover day-to-day payments.

What are financial institutions?

A financial institution conducts financial transactions such as loans, deposits, and investments. Most of us deal with a financial institution on a regular basis, i.e., a bank.

For example, we deposit money, take out a mortgage, use ATMs, and apply for loans. We also use financial institutions to exchange currencies before we travel abroad.

Examples of financial institutions include:

• Commercial banks
• Investment banks
• Insurance companies
• Brokerages
• Investment companies
• Credit unions
• Trust companies
• Money market corporations

Financial activities

Financial activities include anything that involves cash inflows and outflows, i.e., money entering or leaving an entity.

Purchasing and selling things are financial activities, as are the acquisition of shares and bonds.

The verb

As a verb, ‘to finance‘ means to provide the funding or sponsorship for a person, project, or enterprise. In other words, it means ‘to pay’ for something.

For example:

“The study was financed by the Department of Energy,” or “The National Health Service is financed entirely by British taxpayers.”

The adjective

The adjective of the term is ‘financial.’ The word ‘financial’ has several meanings, apart from ‘related to finance.’

Business finance refers to the money needed to run, expand or start a business.

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