Financial Information Services Division
   HOME

TheInfoList



OR:

Finance is the study and discipline of
money Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are as ...
,
currency A currency, "in circulation", from la, Wikt:currens, currens, -entis, literally meaning "running" or "traversing" is a standardization of money in any form, in use or currency in circulation, circulation as a medium of exchange, for example ba ...
and capital assets. It is related to, but not synonymous with
economics Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and intera ...
, the study of production, distribution, and consumption of money, assets,
goods and services Goods are items that are usually (but not always) tangible, such as pens, physical books, salt, apples, and hats. Services are activities provided by other people, who include architects An architect is a person who plans, designs and ov ...
(the discipline of
financial economics Financial economics, also known as finance, is the branch of economics characterized by a "concentration on monetary activities", in which "money of one type or another is likely to appear on ''both sides'' of a trade".William F. Sharpe"Financial ...
bridges the two). Finance activities take place in financial systems at various scopes, thus the field can be roughly divided into personal,
corporate A corporation is an organization—usually a group of people or a company—authorized by the State (polity), state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal ...
, and
public finance Public finance is the study of the role of the government in the economy. It is the branch of economics that assesses the government revenue and government expenditure of the public authorities and the adjustment of one or the other to achiev ...
. In a financial system, assets are bought, sold, or traded as
financial instruments Financial instruments are monetary Contract, contracts between parties. They can be created, traded, modified and settled. They can be cash (currency), evidence of an ownership interest in an entity or a contractual right to receive or deliver in ...
, such as
currencies A currency, "in circulation", from la, Wikt:currens, currens, -entis, literally meaning "running" or "traversing" is a standardization of money in any form, in use or currency in circulation, circulation as a medium of exchange, for example ba ...
,
loans In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that de ...
, bonds,
shares In finance, financial markets, a share is a unit of Equity (finance), equity ownership in the capital stock of a corporation, and can refer to units of mutual funds, limited partnerships, and real estate investment trusts. Share capital refers t ...
,
stocks Stocks are feet restraining devices that were used as a form of corporal punishment and public humiliation. The use of stocks is seen as early as Ancient Greece, where they are described as being in use in Solon's law code. The law describing i ...
, options, futures, etc. Assets can also be banked, invested, and
insured Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management Risk management is th ...
to maximize value and minimize loss. In practice,
risks In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty Uncertainty refers to Epistemology, epistemic situations involving imperfect or unknown information. It applies to predictions of future events, to ...
are always present in any financial action and entities. A broad range of subfields within finance exist due to its wide scope.
Asset In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that c ...
,
money Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are as ...
,
risk In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environme ...
and
investment management Investment management is the professional asset management of various Security (finance), securities, including shareholdings, Bond (finance), bonds, and other assets, such as real estate, to meet specified investment goals for the benefit of inv ...
aim to maximize value and minimize volatility.
Financial analysis Financial analysis (also known as financial statement analysis, accounting analysis, or analysis of finance) refers to an assessment of the viability, stability, and profitability of a business, sub-business or project. It is performed by profes ...
is viability, stability, and profitability assessment of an action or entity. In some cases, theories in finance can be tested using the
scientific method The scientific method is an Empirical evidence, empirical method for acquiring knowledge that has characterized the development of science since at least the 17th century (with notable practitioners in previous centuries; see the article hist ...
, covered by experimental finance. Some fields are multidisciplinary, such as
mathematical finance Mathematical finance, also known as quantitative finance and financial mathematics, is a field of applied mathematics, concerned with mathematical modeling of financial markets. In general, there exist two separate branches of finance that require ...
,
financial law Financial law is the law and regulation of the commercial banking, capital markets, insurance, derivatives and investment management sectors. Understanding financial law is crucial to appreciating the creation and formation of banking regulation ...
,
financial economics Financial economics, also known as finance, is the branch of economics characterized by a "concentration on monetary activities", in which "money of one type or another is likely to appear on ''both sides'' of a trade".William F. Sharpe"Financial ...
,
financial engineering Financial engineering is a multidisciplinary field involving financial theory, methods of engineering, tools of mathematics and the practice of Mathematical programming, programming. It has also been defined as the application of technical methods ...
and
financial technology Fintech, a portmanteau of "financial technology", refers to firms using new technology to compete with traditional financial methods in the delivery of financial services. Artificial intelligence, blockchain, cloud computing, and big data are r ...
. These fields are the foundation of
business Business is the practice of making one's living or making money by producing or Trade, buying and selling Product (business), products (such as goods and Service (economics), services). It is also "any activity or enterprise entered into for pr ...
and
accounting Accounting, also known as accountancy, is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such as businesses and corporations. Accounting, which has been calle ...
. The early history of finance parallels the early
history of money The history of money concerns the development throughout time of systems that provide the functions of money. Such systems can be understood as means of trading wealth indirectly; not directly as with bartering. Money Money is any item or ...
, which is
prehistoric Prehistory, also known as pre-literary history, is the period of human history between the use of the first stone tools by hominin The Hominini form a Tribe (biology), taxonomic tribe of the subfamily Homininae ("hominines"). Hominini i ...
. 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 The global financial system is the worldwide framework of legal agreements, institutions, and both formal and informal economic actors that together facilitate international flows of financial capital for purposes of investment Investmen ...
was formed. It was in the middle of the 20th century that finance emerged as a distinct academic discipline, separate from economics. (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. Finance is widely studied at the undergraduate and masters level.


The financial system

As above, the financial system consists of the flows of capital that take place between individuals and households (
personal finance Personal finance is the financial management which an individual or a family unit performs to personal budget, budget, save, and spend monetary resources over time, taking into account various financial risks and future life events. When plan ...
), governments (
public finance Public finance is the study of the role of the government in the economy. It is the branch of economics that assesses the government revenue and government expenditure of the public authorities and the adjustment of one or the other to achiev ...
), and businesses (
corporate finance Corporate finance is the area of finance that deals with the sources of funding, the capital structure of corporations, the actions that managers take to increase the Value investing, value of the firm to the shareholders, and the tools and anal ...
). "Finance" thus studies the process of channeling money from savers and investors to entities that need it. Savers and investors have money available which could earn interest or dividends if put to productive use. Individuals, companies and governments must obtain money from some external source, such as loans or credit, when they lack sufficient funds to operate. In general, an entity whose income exceeds its
expenditure An expense is an item requiring an outflow of money, or any form of Wealth, fortune in general, to another person or group as payment for an item, service, or other category of costs. For a leasehold estate, tenant, renting, rent is an expense. Fo ...
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 Preferred stock (also called preferred shares, preference shares, or simply preferreds) is a component of share capital that may have any combination of features not possessed by common stock, including properties of both an equity and a debt inst ...
or
common stock Common stock is a form of corporate equity (finance), equity ownership, a type of security (finance), security. The terms voting share and ordinary share are also used frequently outside of the United States. They are known as equity shares or or ...
). The owners of both bonds and stock may be ''
institutional investor An institutional investor is an entity which pools money to purchase Security (finance), securities, real property, and other investment assets or originate loans. Institutional investors include commercial banks, central banks, credit unions, ...
s'' financial institutions such as investment banks and
pension funds A pension fund, also known as a superannuation fund in some countries, is any plan, fund, or scheme which provides pension, retirement income. Pension funds typically have large amounts of money to invest and are the major investors in listed a ...
– or private individuals, called ''
private investors An angel investor (also known as a business angel, informal investor, angel funder, private investor, or seed investor) is an individual who provides capital for a business or businesses Startup company, start-up, usually in exchange for convertibl ...
'' or ''retail investors''. The lending is often indirect, through a
financial intermediary A financial intermediary is an institution or individual that serves as a middleman among diverse parties in order to facilitate financial transactions. Common types include commercial banks, investment banks, stockbrokers, pooled investment funds ...
such as a
bank A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets. Beca ...
, or via the purchase of notes or bonds ( corporate bonds,
government bond A government bond or sovereign bond is a form of bond issued by a government A government is the system or group of people governing an organized community, generally a state. In the case of its broad associative definition, go ...
s, or mutual bonds) in the
bond market The bond market (also debt market or credit market) is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt security (finance), securities, known as the secondary market. This is usually in th ...
. The lender receives interest, the
borrower A debtor or debitor is a legal entity (legal person) that owes a debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or seri ...
pays a higher interest than the lender receives, and the financial intermediary earns the difference for arranging the loan. A bank aggregates the activities of many borrowers and lenders. 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 In finance, stock (also capital stock) consists of all the Share (finance), shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which owners ...
, either individual securities, or via a
mutual fund A mutual fund is a professionally managed investment fund that pools money from many investors to purchase Security (finance), securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe ...
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 bank Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance, the purpose of investing is ...
s. The investment banks find the initial investors and facilitate the listing of the securities, typically shares and bonds. Additionally, they facilitate the
securities exchange A stock exchange, securities exchange, or bourse is an Exchange (organized market), exchange where stockbrokers and stock trader, traders can buy and sell security (finance), securities, such as share (finance), shares of stock, Bond (finance) ...
s, 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 A mutual fund is a professionally managed investment fund that pools money from many investors to purchase Security (finance), securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe ...
,
pension funds A pension fund, also known as a superannuation fund in some countries, is any plan, fund, or scheme which provides pension, retirement income. Pension funds typically have large amounts of money to invest and are the major investors in listed a ...
, 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 A structured product, also known as a market-linked investment, is a pre-packaged structured finance Structured finance is a sector of finance - specifically financial law - that manages Leverage (finance), leverage and Financial risk, risk. Str ...
, as well as specialized financing; this "
financial engineering Financial engineering is a multidisciplinary field involving financial theory, methods of engineering, tools of mathematics and the practice of Mathematical programming, programming. It has also been defined as the application of technical methods ...
" is inherently mathematical, and these institutions are then the major employers of "quants" (see below). In these institutions,
risk management Risk management is the identification, evaluation, and prioritization of risks (defined in ISO 31000 as ''the effect of uncertainty on objectives'') followed by coordinated and economical application of resources to minimize, monitor, and con ...
,
regulatory capital A capital requirement (also known as regulatory capital, capital adequacy or capital base) is the amount of capital a bank A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simulta ...
, and compliance play major roles.


Areas of finance

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
investment Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance, the purpose of investing is ...
s, risk management, and
quantitative finance Mathematical finance, also known as quantitative finance and financial mathematics, is a field of applied mathematics, concerned with mathematical modeling of financial markets. In general, there exist two separate branches of finance that require ...
.


Personal finance

Personal finance is defined as "the mindful planning of monetary spending and saving, while also considering the possibility of future risk". Personal finance may involve paying for education, financing
durable good In economics, a durable good or a hard good or consumer durable is a Good (economics), good that does not quickly wear out or, more specifically, one that yields utility over time rather than being completely Consumption (economics), consumed in ...
s such as
real estate Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more general ...
and cars, buying
insurance Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to Hedge ( ...
, investing, and saving for
retirement Retirement is the withdrawal from one's position or occupation or from one's active working life. A person may also semi-retire by reducing work hours or workload. Many people choose to retire when they are elderly or incapable of doing their j ...
. Personal finance may also involve paying for a loan or other debt obligations. The main areas of personal finance are considered to be income, spending, saving, investing, and protection. The following steps, as outlined by the Financial Planning Standards Board, suggest that an individual will understand a potentially secure personal finance plan after: * 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.


Corporate finance

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 In corporate finance, capital structure refers to the mix of various forms of external funds, known as Financial_capital, capital, used to finance a business. It consists of shareholders' equity, debt (borrowed funds), and preferred stock, and is ...
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 Financial management is the business function concerned with profitability, expenses, cash and credit, so that the "organization may have the means to carry out its objective as satisfactorily as possible;" the latter often defined as maximizi ...
of all firms rather than corporations alone, the concepts are applicable to the financial problems of all firms,Pamela Drake and
Frank Fabozzi Frank J. Fabozzi is an American economist An economist is a professional and practitioner in the social sciences, social science discipline of economics. The individual may also study, develop, and apply theories and concepts from economics ...
(2009)
What Is Finance?
/ref> 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 In finance, stock (also capital stock) consists of all the Share (finance), shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which owners ...
, and its return to shareholders, while also balancing risk and profitability. This entails three primary areas: #
Capital budgeting Capital budgeting in corporate finance is the planning process used to determine whether an organization's long term capital investments such as new machinery, replacement of machinery, new plants, new products, and research development projects ...
: selecting which projects to invest in here, accurately determining value is crucial, as judgements about asset values can be "make or break" #
Dividend policy Dividend policy is concerned with financial policies regarding paying cash dividend in the present or paying an increased dividend at a later stage. Whether to issue dividends, and what amount, is determined mainly on the basis of the company's un ...
: the use of "excess" funds are these to be reinvested in the business or returned to shareholders #
Capital structure In corporate finance, capital structure refers to the mix of various forms of external funds, known as Financial_capital, capital, used to finance a business. It consists of shareholders' equity, debt (borrowed funds), and preferred stock, and is ...
: deciding on the mix of funding to be used here attempting to find the optimal capital mix re debt-commitments vs
cost of capital In economics and accounting, the cost of capital is the cost of a company's funds (both debt and Equity (finance), equity), or from an investor's point of view is "the required rate of return on a portfolio company's existing securities". It is use ...
The latter creates the link with
investment banking Investment banking pertains to certain activities of a financial services company or a Corporate structure, corporate division that consist in advisory-based financial transactions on behalf of individuals, corporations, and governments. Tradition ...
and securities trading, as above, in that the capital raised will generically comprise debt, i.e.
corporate bond A corporate bond is a Bond (finance), bond issued by a corporation in order to raise financing for a variety of reasons such as to ongoing operations, Mergers and acquisitions, M&A, or to expand business. The term is usually applied to Financia ...
s, 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 Inventory (American English) or stock (British English) refers to the goods and materials that a business holds for the ultimate goal of resale, production or utilisation. Stock management, Inventory management is a discipline primarily about s ...
, credit and
debtor A debtor or debitor is a legal entity, legal entity (legal person) that owes a debt to another entity. The entity may be an individual, a firm, a government, a company or other legal person. The counterparty is called a creditor. When the counter ...
s), 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 and .


Public finance

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. These long-term strategic periods typically encompass five or more years. Public finance is primarily concerned with: * Identification of required expenditures of a public sector entity; * Source(s) of that entity's revenue; * The budgeting process; * Sovereign debt issuance, or
municipal bond A municipal bond, commonly known as a muni, is a bond issued by state or local governments, or entities they create such as authorities and special districts. In the United States, interest income received by holders of municipal bonds is often, ...
s for
public works Public works are a broad category of infrastructure Infrastructure is the set of facilities and systems that serve a country, city, or other area, and encompasses the services and facilities necessary for its economy, households and firms t ...
projects. Central banks, such as the
Federal Reserve System The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after ...
banks in the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...
and the
Bank of England The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694 to act as the Kingdom of England, English Government's banker, and still one of the bankers fo ...
in the
United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the European mainland, continental mainland. It comprises England, Scotlan ...
, 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. Development finance, which is related, concerns investment in
economic development In the economics Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the ...
projects provided by a (quasi) governmental institution on a non-commercial basis; these projects would otherwise not be able to get financing. See . A
public–private partnership A public–private partnership (PPP, 3P, or P3) is a long-term arrangement between a government and private sectors, private sector institutions.Hodge, G. A and Greve, C. (2007), Public–Private Partnerships: An International Performance Review ...
is primarily used for
infrastructure Infrastructure is the set of facilities and systems that serve a country, city, or other area, and encompasses the services and facilities necessary for its economy, households and firms to function. Infrastructure is composed of public and priv ...
projects: a private sector corporate provides the financing up-front, and then draws profits from taxpayers and/or users.


Investment management

Investment management is the professional asset management of various securities typically shares and bonds, but also other assets, such as real estate, commodities and
alternative investment An alternative investment, also known as an alternative asset or alternative investment fund (AIF), is an investment Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Invest ...
s 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 An exchange-traded fund (ETF) is a type of investment fund and exchange-traded product, i.e. they are traded on stock exchanges. ETFs are similar in many ways to mutual funds, except that ETFs are bought and sold from other owners throughout the d ...
, or
REIT A real estate investment trust (REIT) is a company that owns, and in most cases operates, income-producing real estate. REITs own many types of commercial real estate, including office building, office and apartment buildings, warehouses, hospital ...
s. At the heart of investment management is
asset allocation Asset allocation is the implementation of an investment strategy that attempts to balance risk In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with re ...
diversifying the exposure among these
asset classes In finance, an asset class is a group of financial instrument Financial instruments are monetary Contract, contracts between parties. They can be created, traded, modified and settled. They can be cash (currency), evidence of an ownership in ...
, 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 An investor profile or style defines an individual's preferences in investment decisions, for example: * Short-term trading (active management) or long term holding (buy and hold) * Risk aversion, Risk-averse or risk tolerant / seeker * All classe ...
). Here: *
Portfolio optimization Portfolio optimization is the process of selecting the best portfolio (asset In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to ...
is the process of selecting the best portfolio given the client's objectives and constraints. *
Fundamental analysis Fundamental analysis, in accounting and finance, is the analysis of a business's financial statements (usually to analyze the business's assets, Liability (financial accounting), liabilities, and earnings); health; and Competition, competitors an ...
is the approach typically applied in valuing and evaluating the individual securities. Overlaid is the portfolio manager's
investment style Investment style refers to different style characteristics of equities In finance, stock (also capital stock) consists of all the Share (finance), shares by which ownership of a corporation or company is divided.Longman Business English Dic ...
broadly, active vs
passive Passive may refer to: * Passive voice, a grammatical voice common in many languages, see also Pseudopassive (disambiguation), Pseudopassive * Passive language, a language from which an interpreter works * Passivity (behavior), the condition of su ...
, value vs growth, and small cap vs. large cap and
investment strategy In finance Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of Production (economics), production, Distribution (economics), distribution, and Consumption ...
. 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 A quantitative fund is an investment fund An investment fund is a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group such as reducing the risks of the investment by a s ...
is managed using computer-based techniques (increasingly,
machine learning Machine learning (ML) is a field of inquiry devoted to understanding and building methods that 'learn', that is, methods that leverage data to improve performance on some set of tasks. It is seen as a part of artificial intelligence. Machine ...
) instead of human judgment. The actual trading also, is typically automated via sophisticated algorithms.


Risk management

Risk management Risk management is the identification, evaluation, and prioritization of risks (defined in ISO 31000 as ''the effect of uncertainty on objectives'') followed by coordinated and economical application of resources to minimize, monitor, and con ...
, 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 Financial risk management is the practice of protecting Value (economics), economic value in a business, firm by using financial instruments to manage exposure to financial risk - principally operational risk, credit risk and market risk, with more ...
is the practice of protecting corporate value by using financial instruments to manage exposure to risk, here called "hedging"; the focus is particularly on credit and market risk, and in banks, through regulatory capital, includes operational risk. *
Credit risk A credit risk is risk of default on a debt that may arise from a borrower failing to make required payments. In the first resort, the risk is that of the lender and includes lost principal and interest, disruption to cash flows, and increased ...
is risk of default on a debt that may arise from a borrower failing to make required payments; *
Market risk Market risk is the risk of losses in positions arising from movements in market variables like prices and volatility. There is no unique classification as each classification may refer to different aspects of market risk. Nevertheless, the most ...
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 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 In telecommunication, provisioning involves the process of preparing and equipping a network to allow it to provide new services to its users. In NS/EP telecommunications, National Security/Emergency Preparedness telecommunications services, ''"p ...
. Secondly, both disciplines share the goal of enhancing or at least preserving, the firm's
economic value In economics, economic value is a measure of the benefit provided by a goods, good or service (economics), service to an Agent (economics), economic agent. It is generally measured through units of currency, and the interpretation is therefore ...
, and in this context overlaps also
enterprise risk management Enterprise risk management (ERM) in business includes the methods and processes used by organizations to manage risks and seize opportunities related to the achievement of their objectives. ERM provides a framework for risk management, which typica ...
, typically the domain of
strategic management In the field of management, strategic management involves the formulation and implementation of the major goals and initiatives taken by an organization's managers on behalf of stakeholders, based on consideration of Resource management, resour ...
. Here, businesses devote much time and effort to
forecasting Forecasting is the process of making predictions based on past and present data. Later these can be compared (resolved) against what happens. For example, a company might Estimation, estimate their revenue in the next year, then compare it against ...
,
analytics Analytics is the systematic computational analysis of data or statistics. It is used for the discovery, interpretation, and communication of meaningful patterns in data. It also entails applying data patterns toward effective decision-making. It ...
and
performance monitoring A performance is an act of staging or presenting a play, concert, or other form of entertainment. It is also defined as the action or process of carrying out or accomplishing an action, task, or function. Management science In the work place ...
. See also "ALM" and
treasury management Treasury management (or treasury operations) includes management Management (or managing) is the administration of an organization, whether it is a business, a nonprofit organization, or a government body. It is the art and science of managi ...
. For banks and other wholesale institutions, 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 A capital requirement (also known as regulatory capital, capital adequacy or capital base) is the amount of capital a bank A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simulta ...
under
Basel III Basel III is the third Basel Accords, Basel Accord, a framework that sets international standards for bank capital adequacy, Bank stress tests, stress testing, and liquidity requirements. Augmenting and superseding parts of the Basel II standard ...
. The calculations here are mathematically sophisticated, and within the domain of
quantitative finance Mathematical finance, also known as quantitative finance and financial mathematics, is a field of applied mathematics, concerned with mathematical modeling of financial markets. In general, there exist two separate branches of finance that require ...
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 The middle office is a team of employees working in a financial services Financial services are the Service (economics), economic services provided by the finance industry, which encompasses a broad range of businesses that manage money, includ ...
"Risk Groups" here, whereas
front office The front office is the part of a company that comes in contact with clients, such as the marketing, sales, and service departments. The term has more specific meaning in different industries. Types General offices The function of 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: these may relate to the portfolio as a whole or to individual stocks; bond portfolios are typically managed via cash flow matching or
immunization Immunization, or immunisation, is the process by which an individual's immune system becomes fortified against an infectious agent (known as the antigen, immunogen). When this system is exposed to molecules that are foreign to the body, called ...
. 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

Quantitative finance also referred to as "mathematical finance" includes those finance activities where a sophisticated mathematical model is required,See discussion here: 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: #Quantitative finance is often synonymous with
financial engineering Financial engineering is a multidisciplinary field involving financial theory, methods of engineering, tools of mathematics and the practice of Mathematical programming, programming. It has also been defined as the application of technical methods ...
. This area generally underpins a bank's customer-driven derivatives business delivering bespoke OTC-contracts and "exotics", and
designing A design is a plan or specification for the construction of an object or system or for the implementation of an activity or process or the result of that plan or specification in the form of a prototype A prototype is an early sample, model, ...
the various structured products and solutions mentioned and encompasses modeling and programming in support of the initial trade, and its subsequent hedging and management. #Quantitative finance also significantly overlaps
financial risk management Financial risk management is the practice of protecting Value (economics), economic value in a business, firm by using financial instruments to manage exposure to financial risk - principally operational risk, credit risk and market risk, with more ...
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. #"Quants" are also responsible for building and deploying the investment strategies at the quantitative funds mentioned; they are also involved in
quantitative investing Quantitative analysis is the use of mathematical Mathematics is an area of knowledge that includes the topics of numbers, formulas and related structures, shapes and the spaces in which they are contained, and quantities and their changes. T ...
more generally, in areas such as
trading strategy In finance, a trading strategy is a fixed plan that is designed to achieve a profitable return by going Long (finance), long or Short (finance), short in markets. The main reasons that a properly researched trading strategy helps are its verifiabil ...
formulation, and in automated trading,
high-frequency trading High-frequency trading (HFT) is a type of algorithmic financial trading characterized by high speeds, high turnover rates, and high order-to-trade ratios that leverages high-frequency financial data and electronic trading tools. While there is no ...
,
algorithmic trading Algorithmic trading is a method of executing orders using automated pre-programmed trading instructions accounting for variables such as time, price, and volume. This type of trading attempts to leverage the speed and computational resources of ...
, and
program trading Program trading is a type of trading in securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages peop ...
.


Financial theory

Financial theory is studied and developed within the disciplines of
management Management (or managing) is the administration of an organization, whether it is a business, a nonprofit organization, or a government body. It is the art and science of managing resources of the business. Management includes the activities ...
, (financial)
economics Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and intera ...
,
accountancy Accounting, also known as accountancy, is the measurement Measurement is the quantification (science), quantification of variable and attribute (research), attributes of an object or event, which can be used to compare with other objec ...
and
applied mathematics Applied mathematics is the application of mathematics, mathematical methods by different fields such as physics, engineering, medicine, biology, finance, business, computer science, and Industrial sector, industry. Thus, applied mathematics is ...
. Abstractly, ''finance'' is concerned with the investment and deployment of
asset In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that c ...
s and liabilities over "space and time"; i.e., it is about performing valuation and
asset allocation Asset allocation is the implementation of an investment strategy that attempts to balance risk In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with re ...
today, based on the risk and uncertainty of future outcomes while appropriately incorporating the
time value of money The time value of money is the widely accepted conjecture that there is greater benefit to receiving a sum of money Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, ...
. Determining the
present value In economics and finance, present value (PV), also known as present discounted value, is the value of an expected income stream determined as of the date of valuation. The present value is usually less than the future value because money has inte ...
of these future values, "discounting", must be at the risk-appropriate discount rate, in turn, a major focus of finance-theory."Finance"
Farlex Financial Dictionary. 2012
Since the debate as to whether finance is an art or a science is still open, there have been recent efforts to organize a list of unsolved problems in finance.


Managerial finance

Managerial finance is the branch of
management Management (or managing) is the administration of an organization, whether it is a business, a nonprofit organization, or a government body. It is the art and science of managing resources of the business. Management includes the activities ...
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 Corporate finance is the area of finance that deals with the sources of funding, the capital structure of corporations, the actions that managers take to increase the Value investing, value of the firm to the shareholders, and the tools and anal ...
: the former allow management to better understand, and hence act on, financial information relating to
profitability In economics, profit is the difference between the revenue In accounting, revenue is the total amount of income generated by the sale of goods and services related to the primary operations of the business. Commercial revenue may also be ...
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 Financial management is the business function concerned with profitability, expenses, cash and credit, so that the "organization may have the means to carry out its objective as satisfactorily as possible;" the latter often defined as maximizi ...
is outlined above. Academics working in this area are typically based in
business school A business school is a university-level institution that confers degrees in business administration or management. A business school may also be referred to as school of management, management school, school of business administration, or ...
finance departments, in
accounting Accounting, also known as accountancy, is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such as businesses and corporations. Accounting, which has been calle ...
, or in
management science Management science (or managerial science) is a wide and interdisciplinary study of solving complex problems and making strategic decisions as it pertains to institutions, corporations, governments and other types of organizational entities. It is ...
.


Financial economics

Financial economics For an overview, se
"Financial Economics"
William F. Sharpe (Stanford University manuscript)
is the branch of
economics Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and intera ...
that studies the interrelation of financial variables, such as
price A price is the (usually not negative) quantity of payment or Financial compensation, compensation given by one Party (law), party to another in return for Good (economics), goods or Service (economics), services. In some situations, the pr ...
s,
interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, th ...
s and shares, as opposed to real economic variables, i.e.
goods and services Goods are items that are usually (but not always) tangible, such as pens, physical books, salt, apples, and hats. Services are activities provided by other people, who include architects An architect is a person who plans, designs and ov ...
. It thus centers on pricing, decision making, and risk management in the
financial market A financial market is a market (economics), market in which people trade financial Security (finance), securities and derivative (finance), derivatives at low transaction costs. Some of the securities include stocks and Bond (finance), bonds, ...
s, and produces many of the commonly employed
financial model Financial modeling is the task of building an abstract representation (a model A model is an informative representation of an object, person or system. The term originally denoted the Plan_(drawing), plans of a building in late 16th-century E ...
s. ( 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: See the discussion re finance theory by Fama and Miller under .
asset pricing In financial economics, asset pricing refers to a formal treatment and development of two main Price, pricing principles, outlined below, together with the resultant models. There have been many models developed for different situations, but cor ...
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 Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance Finance is the study an ...
applied in asset management. The analysis essentially explores how rational investors would apply risk and return to the problem of
investment Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance, the purpose of investing is ...
under uncertainty, producing the key "
Fundamental theorem of asset pricing The fundamental theorems of asset pricing (also: of arbitrage, of finance), in both financial economics and mathematical finance, provide necessary and sufficient conditions for a market to be arbitrage, arbitrage-free, and for a market to be Compl ...
". Here, the twin assumptions of
rationality Rationality is the quality of being guided by or based on reasons. In this regard, a person acts rationally if they have a good reason for what they do or a belief is rational if it is based on strong evidence. This quality can apply to an ab ...
and market efficiency lead to
modern portfolio theory Modern portfolio theory (MPT), or mean-variance analysis, is a mathematical framework for assembling a portfolio of assets such that the expected return is maximized for a given level of risk. It is a formalization and extension of Diversificatio ...
(the CAPM), and to the Black–Scholes theory for option valuation. At more advanced levels and often in response to
financial crises A financial crisis is any of a broad variety of situations in which some financial assets suddenly lose a large part of their nominal value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and man ...
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 Certainty (also known as epistemic certainty or objective certainty) is the epistemic property of beliefs which a person has no rational grounds for doubting. One standard way of defining epistemic certainty is that a belief is certain if and o ...
" (
Fisher separation theorem In economics, the Fisher separation theorem asserts that the primary objective of a corporation will be the maximization of its present value, regardless of the preferences of its shareholders. The theorem therefore separates management's "product ...
, "theory of investment value",
Modigliani–Miller theorem The Modigliani–Miller theorem (of Franco Modigliani, Merton Miller) is an influential element of economic theory; it forms the basis for modern thinking on capital structure. The basic theorem states that in the absence of taxes, bankruptcy costs ...
). 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

Financial mathematics Research Area: Financial Mathematics and Engineering
Society for Industrial and Applied Mathematics
is the field of
applied mathematics Applied mathematics is the application of mathematics, mathematical methods by different fields such as physics, engineering, medicine, biology, finance, business, computer science, and Industrial sector, industry. Thus, applied mathematics is ...
concerned with
financial market A financial market is a market (economics), market in which people trade financial Security (finance), securities and derivative (finance), derivatives at low transaction costs. Some of the securities include stocks and Bond (finance), bonds, ...
s; 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 A government is the system or group of people governing an organized community, generally a state. In the case of its broad associative definition, government normally consists of legislature, executive, and judiciary. Government ...
, and
corporate A corporation is an organization—usually a group of people or a company—authorized by the State (polity), state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal ...
-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,For a survey, se
"Financial Models"
from Michael Mastro (2013). ''Financial Derivative and Energy Market Valuation'', John Wiley & Sons. .
Itô's stochastic calculus,
simulation A simulation is the imitation of the operation of a real-world process or system over time. Simulations require the use of Conceptual model, models; the model represents the key characteristics or behaviors of the selected system or proc ...
, and
partial differential equation In mathematics, a partial differential equation (PDE) is an equation which imposes relations between the various partial derivatives of a Multivariable calculus, multivariable function. The function is often thought of as an "unknown" to be sol ...
s; see aside boxed discussion re the prototypical Black-Scholes and the various numeric techniques now applied *for risk management,See generally, Roy E. DeMeo (N.D.
Quantitative Risk Management: VaR and Others
/ref>
value at risk Value at risk (VaR) is a measure of the risk of loss for investments. It estimates how much a set of investments might lose (with a given probability), given normal market conditions, in a set time period such as a day. VaR is typically used by ...
,
stress testing Stress testing (sometimes called torture testing) is a form of deliberately intense or thorough testing used to determine the stability of a given system, critical infrastructure or entity. It involves testing beyond normal operational capacity, ...
, "sensitivities" analysis (applying the "greeks"), and
xVA An X-Value Adjustment (XVA, xVA) is an umbrella term In linguistics, semantics, general semantics, and ontology components, ontologies, hyponymy () is a wikt:Wiktionary:Semantic relations, semantic relation between a hyponym denoting a subset, ...
; the underlying mathematics comprises
mixture models In statistics, a mixture model is a probabilistic model for representing the presence of subpopulations within an overall population, without requiring that an observed data set should identify the sub-population to which an individual observation ...
, PCA, volatility clustering and copulas. *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 In mathematical finance, a risk-neutral measure (also called an equilibrium measure, or ''Equivalence (measure theory), equivalent Martingale (probability theory), martingale Probability measure, measure'') is a probability measure such that eac ...
(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 model A mathematical model is a description of a system using mathematical concepts and language Language is a structured system of communication. The structure of a language is its grammar and the free components are its vocabulary. Languag ...
s suggested.
Computational finance Computational finance is a branch of applied computer science Computer science is the study of computation, automation, and information. Computer science spans theoretical disciplines (such as algorithms, theory of computation, information ...
is the branch of (applied)
computer science Computer science is the study of computation, automation, and information. Computer science spans theoretical disciplines (such as algorithms, theory of computation, information theory, and automation) to Applied science, practical discipli ...
that deals with problems of practical interest in finance, and especially emphasizes the
numerical methods Numerical analysis is the study of algorithms that use numerical approximation (as opposed to symbolic computation, symbolic manipulations) for the problems of mathematical analysis (as distinguished from discrete mathematics). It is the study of ...
applied here.


Experimental finance

Experimental financeBloomfield, Robert and Anderson, Alyssa
"Experimental finance"
. In Baker, H. Kent, and Nofsinger, John R., eds. Behavioral finance: investors, corporations, and markets. Vol. 6. John Wiley & Sons, 2010. pp. 113-131.
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

Behavioral finance Behavioral economics studies the effects of Psychology, psychological, cognitive bias, cognitive, emotional, cultural and social factors on the decision making, decisions of individuals or institutions, such as how those decisions vary from t ...
studies how the ''
psychology Psychology is the science, scientific study of mind and behavior. Psychology includes the study of consciousness, conscious and Unconscious mind, unconscious phenomena, including feelings and thoughts. It is an academic discipline of immens ...
'' of investors or managers affects financial decisions and markets 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. Behavioral finance has grown over the last few decades to become an integral aspect of finance. Behavioral finance includes such topics as: # Empirical studies that demonstrate significant deviations from classical theories; # Models of how psychology affects and impacts trading and prices; # Forecasting based on these methods; # 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

Quantum finance is an interdisciplinary research field, applying theories and methods developed by
quantum physicists In physics Physics is the natural science that studies matter, its Elementary particle, fundamental constituents, its motion and behavior through Spacetime, space and time, and the related entities of energy and force. "Physical science ...
and economists in order to solve problems in finance. It is a branch of
econophysics Econophysics is a Heterodox economics, heterodox interdisciplinary research field, applying theories and methods originally developed by physicists in order to solve problems in economics, usually those including uncertainty or stochastic processes ...
. Finance theory is heavily based on financial instrument pricing such as
stock option In finance, an option is a contract which conveys to its owner, the ''holder'', the right, but not the obligation, to buy or sell a specific quantity of an underlying asset or financial instrument, instrument at a specified strike price on or be ...
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 Computational finance is a branch of applied computer science Computer science is the study of computation, automation, and information. Computer science spans theoretical disciplines (such as algorithms, theory of computation, information ...
. 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

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 Uruk, also known as Warka or Warkah, was an ancient city of Sumer (and later of Babylonia) situated east of the present bed of the Euphrates River on the dried-up ancient channel of the Euphrates east of modern Samawah, Muthanna Governorate, Al ...
in
Mesopotamia Mesopotamia ''Mesopotamíā''; ar, بِلَاد ٱلرَّافِدَيْن or ; syc, ܐܪܡ ܢܗܪ̈ܝܢ, or , ) is a historical region of Western Asia situated within the Tigris–Euphrates river system, in the northern part of the F ...
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. The
Code of Hammurabi The Code of Hammurabi is a Babylonian legal text composed 1755–1750 BC. It is the longest, best-organised, and best-preserved legal text from the ancient Near East. It is written in the Old Babylonian dialect of Akkadian language, Akkadian, p ...
(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 Cowrie or cowry () is the common name In biology, a common name of a taxon or organism (also known as a vernacular name, English name, colloquial name, country name, popular name, or farmer's name) is a name that is based on the normal ...
shells were used as a form of money in
China China, officially the People's Republic of China (PRC), is a country in East Asia. It is the world's List of countries and dependencies by population, most populous country, with a Population of China, population exceeding 1.4 billion, slig ...
. By 640 BC, the
Lydians The Lydians (known as ''Sparda'' to the Achaemenids, Old Persian cuneiform Wikt:𐎿𐎱𐎼𐎭, 𐎿𐎱𐎼𐎭) were Anatolians, Anatolian people living in Lydia, a region in western Anatolia, who spoke the distinctive Lydian language, an ...
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.) 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 The Roman Republic ( la, Res publica Romana ) was a form of government of Rome and the era of the ancient Rome, classical Roman civilization when it was run through res publica, public Representation (politics), representation of the Roman peo ...
, interest was outlawed altogether by the ''Lex Genucia'' reforms. Under
Julius Caesar Gaius Julius Caesar (; ; 12 July 100 BC – 15 March 44 BC), was a Roman people, Roman general and statesman. A member of the First Triumvirate, Caesar led the Roman armies in the Gallic Wars before defeating his political rival Pompey in Caes ...
, a ceiling on interest rates of 12% was set, and later under
Justinian Justinian I (; la, Flavius Petrus Sabbatius Iustinianus, ; grc-gre, Ἰουστινιανός ; 48214 November 565), also known as Justinian the Great, was the Eastern Roman emperor from 527 to 565. His reign is marked by the ambitious but ...
it was lowered even further to between 4% and 8%. It's said Belgium is the place where the first exchange happened back in approximately 1531. Since, popular exchanges such as the London Stock Exchange (founded in 1773) and the New York Stock Exchange (founded in 1793) were created.


Image gallery

File:Babylonian - Economic Document - Walters 482030 - View A.jpg, Babylonian tablet, part of the economic archives of the temple of the sky-god Anu and fertility-goddess
Ishtar Inanna, also sux, 𒀭𒊩𒌆𒀭𒈾, nin-an-na, label=none is an List of Mesopotamian deities, ancient Mesopotamian goddess of love, war, and fertility. She is also associated with beauty, sex, Divine law, divine justice, and political p ...
at
Uruk Uruk, also known as Warka or Warkah, was an ancient city of Sumer (and later of Babylonia) situated east of the present bed of the Euphrates River on the dried-up ancient channel of the Euphrates east of modern Samawah, Muthanna Governorate, Al ...
, recording a payment made in c. 549 BC File:Emanuel de Witte - De binnenplaats van de beurs te Amsterdam.jpg, alt=Courtyard of the Amsterdam Stock Exchange, 1653, the world's first formal stock exchange., Courtyard of the
Amsterdam Stock Exchange Euronext Amsterdam is a stock exchange based in Amsterdam, the Netherlands. Formerly known as the Amsterdam Stock Exchange, it merged on 22 September 2000 with the Brussels Stock Exchange and the Paris Stock Exchange to form Euronext. The reg ...
, 1653, the world's first formal
stock exchange A stock exchange, securities exchange, or bourse is an Exchange (organized market), exchange where stockbrokers and stock trader, traders can buy and sell security (finance), securities, such as share (finance), shares of stock, Bond (finance) ...
File:Dojima-Rice-Exchange-Osaka-by-Yoshimitsu-Sasaki.png, alt=Dōjima Rice Exchange, the world's first futures exchange, established in Osaka in 1697.,
Dōjima Rice Exchange The Dōjima Rice Exchange (堂島米市場, ''Dōjima kome ichiba'', 堂島米会所, ''Dōjima kome kaisho''), located in Osaka, was the center of Japan's system of rice brokers, which developed independently and privately in the Edo period a ...
, the world's first
futures exchange A futures exchange or futures market is a central financial exchange where people can trade standardized futures contract In finance Finance is the study and discipline of money, currency and capital assets. It is related to, but not syno ...
, established in
Osaka is a Cities designated by government ordinance of Japan, designated city in the Kansai region of Honshu in Japan. It is the capital of and most populous city in Osaka Prefecture, and the List of cities in Japan, third most populous city in Ja ...
in 1697


See also

*
Outline of finance The following Outline (list), outline is provided as an overview of and topical guide to finance: Finance – addresses the ways in which individuals and organizations raise and allocate monetary factors of production, resources over time, ta ...
*
Financial crisis of 2007–2010 Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of Production (economics), production, Distribution (economics), distribution, and Consumption (economics) ...


Notes


References


Further reading

* * *'' 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. * * * * *


External links


Finance Definition - Investopedia

Finance Definition - Corporate Finance Institute


( 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) {{Authority control