Finance is a wide and varied term, covering a wide range of subjects concerning the study, production, and management of financial resources and securities. In particular, it concerns the issues of how individuals, businesses or governments obtain the money necessary to conduct business – known as the capital in the business context — and how those funds are used or spent. Finance can further be applied to examine the costs of an investment as a percent of the potential gain, as the price of the stock or other underlying assets is determined and measured. Finally, finance describes the risk-premium attached to the financial instruments bought and sold, as well as the methods by which losses and gains are measured. Finance is important in all areas of life, from managing our money to buying cars and homes.
In this main article, we’ll examine some of the most important topics regarding finance. We’ll consider the three broad areas of financial markets: private markets, central banks, and government spending and debt. We’ll also examine three topics that are closely related to all three areas but not covered here: macro economics, risk management, and securities pricing. The main topic is financial mathematics, so we’ll address some of these in the following chapters.
Private markets. Finance is intimately involved in all areas of business activity, from the sale of corporate stock to the acquisition of small businesses. Some firms create private markets to increase competition or reduce investment risk by insuring against specific types of risks. Examples include angel investors and venture capital firms. Other firms conduct normal business activities in the market and use financial instruments to gain an advantage over other firms. In all cases, the key issue is how to create a competitive advantage through efficient utilization of existing resources.
Central banks. Central banks play an important role in financing the economy by providing interest rates, credit controls, and other monetary interventions. These banks usually operate in the form of governments, commercial banks, or central banking systems, which they design, develop, manage, and control. They normally control the supply of, and the amount of money in circulation. Central banks are responsible for many of the complex financial instruments associated with the financial system, including interest rates, loans, securities, bank reserves, and foreign exchange.
Government finance. Government finance includes the budget, taxing and spending programs of both federal and state governments. Many governmental agencies provide direct financing to businesses, but other forms of indirect or direct finance are also included, such as borrowing from banks, issuing debt, using other financial instruments, or creating and guaranteeing public bonds.
Behavioral finance. Many people think of finance as a science, but in reality it is very much a part of everyday life. Behavioral finance describes the way people make financial decisions, both good and bad. The goal of behavioral finance is to understand why people take these and other financial decisions. This research is used in many different fields, including management theory, decision sciences, and planning.