"Finance" is
often defined simply as the management of money or “funds” management. Modern
finance, however, is a family of business activity that includes the
origination, marketing, and management of cash and money surrogates through a
variety of capital accounts, instruments, and markets created for transacting
and trading assets, liabilities, and risks. Finance is conceptualized,
structured, and regulated by a complex system of power relations within
political economies across state and global markets. Finance is both art (e.g.
product development) and science (e.g. measurement), although these activities
increasingly converge through the intense technical and institutional focus on
measuring and hedging risk-return relationships that underlie shareholder
value. Networks of financial businesses exist to create, negotiate, market, and
trade in evermore-complex financial products and services for their own as well
as their clients’ accounts. Financial performance measures assess the
efficiency and profitability of investments, the safety of debtors’ claims
against assets, and the likelihood that derivative instruments will protect
investors against a variety of market risks .
The financial system
consists of public and private interests and the markets that serve them. It
provides capital from individual and institutional investors who transfer money
directly and through intermediaries to other individuals, firms, and
governments that acquire resources and transact business. With the expectation
of reaping profits, investors fund credit in the forms of debt capital , equity capital, and the derivative products of
a wide variety of capital investments including debt and equity securities,
property, commodities, and insurance products. Although closely related, the
disciplines of economics and finance are distinctive. The “economy” is a social
institution that organizes a society’s production, distribution, and
consumption of goods and services,” all of which must be financed. Economists
make a number of abstract assumptions for purposes of their analyses and
predictions. They generally regard financial markets that function for the
financial system as an efficient mechanism. In practice, however, emerging
research is demonstrating that such assumptions are unreliable. Instead,
financial markets are subject to human error and emotion. New research
discloses the mischaracterization of investment safety and measures of
financial products and markets so complex that their effects, especially under
conditions of uncertainty, are impossible to predict. The study of finance is
subsumed under economics as finance economics, but the scope, speed, power
relations and practices of the financial system can uplift or cripple whole
economies and the well-being of households, businesses and governing bodies
within them—sometimes in a single day.
Three overarching
divisions exist within the academic discipline of finance and its related
practices: first, personal finance: the
finances of individuals and families concerning household income and expenses,
credit and debt management, saving and investing, and income security in later
life, second, corporate finance: the finances of for-profit organizations
including corporations, trusts, partnerships and other entities, and third,
public finance: the financial affairs of domestic and international governments
and other public entities. Areas of study within (and the interactions
among) these three levels affect all dimensions of social life: politics,
taxes, art, religion, housing, health care, poverty and wealth, consumption,
sports, transportation, labor force participation, media, and education. While
each has a vast accumulated literature of its own, the effects of macro and
micro level financing that mold and impact these and other domains of human and
societal life typically have been treated by researchers as “policy,”
“welfare,” “work,” “stratification,” and so forth, or have been largely
unexplored. Recent research in "behavioral finance" is promising,
albeit a relative newcomer, to the existing body of financial research that
focuses primarily on measurement.
Loans have become
increasingly packaged for resale, meaning that an investor buys the
loan (debt) from a bank or directly from a corporation. Bonds are debt
instruments sold to investors for organizations such as companies, governments
or charities. The investor can then hold the debt and collect
the interest or sell the debt on a secondary market. Banks are the main
facilitators of funding through the provision of credit,
although private equity, mutual funds, hedge funds, and other
organizations have become important as they invest in various forms of debt.
Financial assets, known as investments, are financially
managed with careful attention to financial risk management to
control financial risk. Financial instruments allow many forms
of securitized assets to be traded on securities
exchanges such as stock exchanges, including debt such
as bonds as well as equity in publicly traded
corporations.
Central banks, such as
the Federal Reserve System banks in the United
States and Bank of England in the United Kingdom, are
strong players in public finance, acting as lenders of last resort as
well as strong influences on monetary and credit conditions in the economy.
