Finance

Finance refers to monetary resources and to the study and discipline of money, currency, assets and liabilities.

Ancient and medieval civilizations incorporated basic functions of finance, such as banking, trading and accounting, into their economies.

Individuals, companies and governments must obtain money from some external source, such as loans or credit, when they lack sufficient funds to run their operations.

In general, an entity whose income exceeds its expenditure can lend or invest the excess, intending to earn a fair return.

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.

The main areas of personal finance are considered to be income, spending, saving, investing, and protection.

The following steps, as outlined by the Financial Planning Standards Board,[10] suggest that an individual will understand a potentially secure personal finance plan after: 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.

Typically, "corporate finance" relates to the long term objective of maximizing the value of the entity's assets, its stock, and its return to shareholders, while also balancing risk and profitability.

This entails[13] three primary areas: 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.

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.

It generally encompasses a long-term strategic perspective regarding investment decisions that affect public entities.

A public–private partnership is primarily used for infrastructure projects: a private sector corporate provides the financing up-front, and then draws profits from taxpayers or users.

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.

A quantitative fund is managed using computer-based mathematical techniques (increasingly, machine learning) instead of human judgment.

For banks and other wholesale institutions,[23] 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.

Additional to diversification, the fundamental risk mitigant here, investment managers will apply various hedging techniques as appropriate,[12] these may relate to the portfolio as a whole or to individual stocks.

In parallel, managers – active and passive – will monitor tracking error, thereby minimizing and preempting any underperformance vs their "benchmark".

[26] As financial theory has roots in many disciplines, including mathematics, statistics, economics, physics, and psychology, it can be considered a mix of an art and science,[27] and there are ongoing related efforts to organize a list of unsolved problems in finance.

It provides the theoretical underpin for the practice described above, concerning itself with the managerial application of the various finance techniques.

Academics working in this area are typically based in business school finance departments, in accounting, or in management science.

The discipline has two main areas of focus:[25] 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: Financial mathematics[33] 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.

Experimental finance[36] 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.

Research may proceed by conducting trading simulations or by establishing and studying the behavior of people in artificial, competitive, market-like settings.

Although quantum computational methods have been around for quite some time and use the basic principles of physics to better understand the ways to implement and manage cash flows, it is mathematics that is actually important in this new scenario[41] Finance theory is heavily based on financial instrument pricing such as stock option pricing.

Banking originated in West Asia, where temples and palaces were used as safe places for the storage of valuables.

[44] Shortly after, cities in Classical Greece, such as Aegina, Athens, and Corinth, started minting their own coins between 595 and 570 BCE.

During the Roman Republic, interest was outlawed by the Lex Genucia reforms in 342 BCE, though the provision went largely unenforced.

Bond issued by The Baltimore and Ohio Railroad. Bonds are a form of borrowing used by corporations to finance their operations.
Share certificate dated 1913 issued by the Radium Hill Company
NYSE's stock exchange traders floor c 1960, before the introduction of electronic readouts and computer screens
Chicago Board of Trade Corn Futures market, 1993
Oil traders , Houston, 2009
Wealth management consultation—here, the financial advisor counsels the client on an appropriate investment strategy .
President George W. Bush , speaking on the Federal Budget in 2007, requesting additional funds from Congress
CBO: 2023 US Federal Budget Infographic
Share prices listed in a Korean newspaper
"The excitement before the bubble burst"—viewing prices via ticker tape , shortly before the Wall Street crash of 1929
A modern price-ticker. This infrastructure underpins contemporary exchanges, evidencing prices and related ticker symbols. The ticker symbol is represented by a unique set of characters used to identify the subject of the financial transaction.
Crowds gathering outside the New York Stock Exchange after the Wall Street crash of 1929
Customers queuing outside a Northern Rock branch in the United Kingdom to withdraw their savings during the 2007–2008 financial crisis
Dōjima Rice Exchange, the world's first futures exchange, established in Osaka in 1697.
Dōjima Rice Exchange , the world's first futures exchange , established in Osaka in 1697
Decision trees , a more sophisticated valuation-approach, sometimes applied to corporate finance "project" valuations (and a standard [ 28 ] in business school curricula); various scenarios are considered, and their discounted cash flows are probability weighted.
The " efficient frontier ", a prototypical concept in portfolio optimization. Introduced in 1952 , it remains "a mainstay of investing and finance". [ 30 ] An "efficient" portfolio, i.e. combination of assets, has the best possible expected return for its level of risk (represented by the standard deviation of return).
Modigliani–Miller theorem , a foundational element of finance theory, introduced in 1958; it forms the basis for modern thinking on capital structure . Even if leverage ( D/E ) increases, the WACC (k0) stays constant.
"Trees" are widely applied in mathematical finance; here used in calculating an OAS . Other common pricing-methods are simulation and PDEs . These are used for settings beyond those envisaged by Black-Scholes. Post crisis , even in those settings, banks use local and stochastic volatility models to incorporate the volatility surface , while the xVA adjustments accommodate counterparty and capital considerations.