Finance refers to monetary resources and to the study and

discipline Discipline is the self-control that is gained by requiring that rules or orders be obeyed, and the ability to keep working at something that is difficult. Disciplinarians believe that such self-control is of the utmost importance and enforce a ...

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: m ...

currency A currency is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins. A more general definition is that a currency is a ''system of money'' in common use within a specific envi ...

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 can b ...

s and liabilities. As a subject of study, is a field of

Business Administration Business administration is the administration of a commercial enterprise. It includes all aspects of overseeing and supervising the business operations of an organization. Overview The administration of a business includes the performance o ...

wich study the planning, organizing, leading, and controlling of an organization's resources to achieve its goals. Based on the scope of financial activities in

financial system A financial system is a system that allows the exchange of funds between financial market participants such as lenders, investors, and borrowers. Financial systems operate at national and global levels. Financial institutions consist of comple ...

s, the discipline can be divided into

personal Personal may refer to: Aspects of persons' respective individualities * Privacy * Personality * Personal, personal advertisement, variety of classified advertisement used to find romance or friendship Companies * Personal, Inc., a Washington, ...

corporate A corporation or body corporate is an individual or a group of people, such as an association or company, that has been authorized by the state to act as a single entity (a legal entity recognized by private and public law as "born out of s ...

, and

public finance Public finance refers to the monetary resources available to governments and also to the study of finance within government and role of the government in the economy. Within academic settings, public finance is a widely studied subject in man ...

. In these financial systems, assets are bought, sold, or traded as

financial instrument Financial instruments are monetary 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 the form ...

s, such as

currencies A currency is a standardization of money in any form, in use or currency in circulation, circulation as a medium of exchange, for example banknotes and coins. A more general definition is that a currency is a ''system of money'' in common use wi ...

loan In finance, a loan is the tender of money by one party to another with an agreement to pay it back. The recipient, or borrower, incurs a debt and is usually required to pay interest for the use of the money. The document evidencing the deb ...

s, bonds,

shares In financial markets, a share (sometimes referred to as stock or equity) is a unit of equity ownership in the capital stock of a corporation. It can refer to units of mutual funds, limited partnerships, and real estate investment trusts. Sha ...

stock Stocks (also capital stock, or sometimes interchangeably, shares) consist of all the Share (finance), shares by which ownership of a corporation or company is divided. A single share of the stock means fractional ownership of the corporatio ...

s, options,

futures Futures may mean: Finance *Futures contract, a tradable financial derivatives contract *Futures exchange, a financial market where futures contracts are traded *''Modern Trader'', formerly Futures, an American finance magazine Music * ''Futures' ...

, etc. Assets can also be

bank A bank is a financial institution that accepts Deposit account, 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 m ...

ed, invested, and insured to maximize value and minimize loss. In practice,

risks 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 environ ...

are always present in any financial action and entities. Due to its wide scope, a broad range of subfields exists within finance. Asset-, money-, risk- and

investment management Investment management (sometimes referred to more generally as financial asset management) is the professional asset management of various Security (finance), securities, including shareholdings, Bond (finance), bonds, and other assets, such as r ...

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, project or investment. It is per ...

assesses the viability, stability, and profitability of an action or entity. 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 in the financial field. In general, there exist two separate branches of finance that req ...

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 and finan ...

financial economics Financial economics 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 Economics", in Its co ...

financial engineering Financial engineering is a multidisciplinary field involving financial theory, methods of engineering, tools of mathematics and the practice of programming. It has also been defined as the application of technical methods, especially from mathe ...

and

financial technology Financial technology (abbreviated as fintech) refers to the application of innovative technologies to products and services in the financial industry. This broad term encompasses a wide array of technological advancements in financial services, ...

. 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 ...

and

accounting Accounting, also known as accountancy, is the process of recording and processing information about economic entity, economic entities, such as businesses and corporations. Accounting measures the results of an organization's economic activit ...

. 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 been referred to while doing science since at least the 17th century. Historically, it was developed through the centuries from the ancient and ...

, covered by

experimental finance The goals of experimental finance are to understand human and market behavior in settings relevant to finance. Experiments are synthetic economic environments created by researchers specifically to answer research questions. This might involve, for ...

. The early history of finance parallels the early

history of money The history of money is the development over time of systems for the exchange of goods and services. Money is a means of fulfilling these functions indirectly and in general rather than directly, as with barter. Money may take a physical form ...

, which is

prehistoric Prehistory, also called pre-literary history, is the period of human history between the first known use of stone tools by hominins million years ago and the beginning of recorded history with the invention of writing systems. The use o ...

. 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 agent (economics), economic action that together facilitate international flows of financial capital for purposes of investme ...

was formed. In the middle of the 20th century, finance emerged as a distinct academic discipline, separate from economics. The earliest doctoral programs in finance were established in the 1960s and 1970s. Today, finance is also widely studied through career-focused undergraduate and master's level programs.

The financial system

As outlined, the financial system consists of the flows of capital that take place between individuals and households (

personal finance Personal finance is the financial management that an individual or a family unit performs to budget, save, and spend monetary resources in a controlled manner, taking into account various financial risks and future life events. When planni ...

), governments (

), and businesses (

corporate finance Corporate finance is an area of finance that deals with the sources of funding, and the capital structure of businesses, the actions that managers take to increase the Value investing, value of the firm to the shareholders, and the tools and analy ...

). "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 run their operations. In general, an entity whose income exceeds its

expenditure An expense is an item requiring an outflow of money, or any form of fortune in general, to another person or group as payment for an item, service, or other category of costs. For a tenant, rent is an expense. For students or parents, tuition i ...

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 ins ...

common stock Common stock is a form of corporate equity ownership, a type of security. The terms voting share and ordinary share are also used frequently outside of the United States. They are known as equity shares or ordinary shares in the UK and other C ...

). The owners of both bonds and stock may be

institutional investor An institutional investor is an entity that pools money to purchase securities, real property, and other investment assets or originate loans. Institutional investors include commercial banks, central banks, credit unions, government-linked ...

s—financial institutions such as investment banks and

pension funds A pension fund, also known as a superannuation fund in some countries, is any program, fund, or scheme which provides retirement income. The U.S. Government's Social Security Trust Fund, which oversees $2.57 trillion in assets, is the world' ...

—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 to a business or businesses, including startups, usually in exchange for convertible debt ...

or retail investors. (See

Financial market participants There are two basic financial market participant distinctions, investors versus speculators and institutional versus retail. Action in financial markets by central banks is usually regarded as intervention rather than participation. Supply ...

.) The

lending In finance, a loan is the tender of money by one party to another with an agreement to pay it back. The recipient, or borrower, incurs a debt and is usually required to pay interest for the use of the money. The document evidencing the debt ( ...

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, insurance and pe ...

such as a

, or via the purchase of notes or bonds ( corporate bonds,

government bond A government bond or sovereign bond is a form of Bond (finance), bond issued by a government to support government spending, public spending. It generally includes a commitment to pay periodic interest, called Coupon (finance), coupon payments' ...

s, or mutual bonds) in the

bond market The bond market (also debt market or credit market) is a financial market in which 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 ...

. The lender receives interest, the

borrower A debtor or debitor is a 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 counterpart of thi ...

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. Banks accept deposits from individuals and businesses, paying interest on these funds. The bank then lends these deposits to borrowers. Banks facilitate transactions between borrowers and lenders of various sizes, enabling efficient financial coordination. Investing typically entails the purchase of

, either individual securities or via a

mutual fund A mutual fund is an 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 include the SICAV in ...

, for example. Stocks are usually sold by corporations to investors so as to raise required capital in the form of "

equity financing In finance, equity is an ownership interest in property that may be subject to debts or other liabilities. Equity is measured for accounting purposes by subtracting liabilities from the value of the assets owned. For example, if someone owns ...

", as distinct from the debt financing described above. The financial intermediaries here are the

investment bank Investment is traditionally defined as the "commitment of resources into something expected to gain value over time". If an investment involves money, then it can be defined as a "commitment of money to receive more money later". From a broade ...

s (which find the initial investors and facilitate the listing of the securities, typically shares and bonds), the securities exchanges (which allow their trade thereafter), and the various investment service providers (including

mutual funds A mutual fund is an investment fund that pools money from many investors to purchase securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICAV in Europe ('investmen ...

, wealth managers, and stock brokers, typically servicing retail investors). 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 investment strategy based on a single Security (finance), security, a basket of securities, Option (finance), options, Index (economics), indices, ...

, as well as specialized financing; this "

" is inherently mathematical, and these institutions are then the major employers of

quantitative analyst Quantitative analysis is the use of mathematical and statistical methods in finance and investment management. Those working in the field are quantitative analysts (quants). Quants tend to specialize in specific areas which may include derivative ...

s (or "quants", see

below Below may refer to: *Earth *Ground (disambiguation) *Soil *Floor * Bottom (disambiguation) *Less than *Temperatures below freezing *Hell or underworld People with the surname * Ernst von Below (1863–1955), German World War I general * Fred Belo ...

). In these institutions,

risk management Risk management is the identification, evaluation, and prioritization of risks, followed by the minimization, monitoring, and control of the impact or probability of those risks occurring. Risks can come from various sources (i.e, Threat (sec ...

regulatory capital A capital requirement (also known as regulatory capital, capital adequacy or capital base) is the amount of capital a bank or other financial institution has to have as required by its financial regulator. This is usually expressed as a capital ...

, 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 traditionally defined as the "commitment of resources into something expected to gain value over time". If an investment involves money, then it can be defined as a "commitment of money to receive more money later". From a broade ...

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 in the financial field. In general, there exist two separate branches of finance that requ ...

Personal finance

Personal finance refers to the practice of budgeting to ensure enough funds are available to meet basic needs, while ensuring there is only a reasonable level of risk to lose said capital. 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 that does not quickly wear out or, more specifically, one that yields utility over time rather than being completely consumed in one use. Items like bricks could be conside ...

s such as real estate 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 protect ...

, 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 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 capital, used to finance a business. It consists of shareholders' equity, debt (borrowed funds), and preferred stock, and is detailed in the ...

of corporations, and the tools and analysis used to allocate financial resources. While corporate finance is in principle different from

managerial finance Managerial finance is the branch of finance that concerns itself with the financial aspects of managerial decisions. financial management 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, educator, writer, and investor, currently Professor of Practice at The Johns Hopkins University Carey Business School and a Member of Edhec Risk Institute. He was previously a professor of finance at E ...

(2009)
What Is Finance?
and this area is then often referred to as "business finance". Typically, "corporate finance" relates to the ''long term'' objective of maximizing the value of the entity's assets, its

, and its return to shareholders, while also balancing risk and profitability. This entails three primary areas: #

Capital budgeting Capital budgeting in corporate finance, corporate planning and accounting is an area of capital management that concerns the planning process used to determine whether an organization's long term capital investments such as new machinery, repla ...

: 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, in financial management and corporate finance, is concerned with Aswath Damodaran (N.D.)Returning Cash to the Owners: Dividend Policy/ref> the policies regarding dividends; more specifically paying a cash dividend in the pr ...

: the use of "excess" funds—these are 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 capital, used to finance a business. It consists of shareholders' equity, debt (borrowed funds), and preferred stock, and is detailed in the ...

: 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), or from an investor's point of view is "the required rate of return on a portfolio company's existing securities". It is used to evaluate ne ...

. (This consists in understanding how much the firm has to generate to satisfy investors, and by minimizing the

weighted average cost of capital The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. The WACC is commonly referred to as the firm's cost of capital. Importantly, it is dictated by ...

(WACC) so that the value of the company increases.) The latter creates the link with

investment banking Investment banking is an advisory-based financial service for institutional investors, corporations, governments, and similar clients. Traditionally associated with corporate finance, such a bank might assist in raising financial capital by und ...

and securities trading, as above, in that the capital raised will generically comprise debt, i.e.

corporate bond A corporate bond is a bond issued by a corporation in order to raise financing for a variety of reasons such as to ongoing operations, mergers & acquisitions, or to expand business. It is a longer-term debt instrument indicating that a corpo ...

s, and equity, often listed shares. Re risk management within corporates, see

. Financial managers—i.e. as distinct from corporate financiers—focus more on the ''short term'' elements of profitability, cash flow, and "

working capital management Working capital (WC) is a financial metric which represents operating liquidity available to a business, organisation, or other entity, including governmental entities. Along with fixed assets such as plant and equipment, working capital is consi ...

" (

inventory Inventory (British English) or stock (American English) is a quantity of the goods and materials that a business holds for the ultimate goal of resale, production or utilisation. Inventory management is a discipline primarily about specifying ...

, credit and

debtor A debtor or debitor is a 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 counterpart of this ...

s), which is concerned about the daily funding operations, and the goal is to maintain liquidity, minimize risk and maximize efficiency ensuring that the firm can safely and profitably carry out its financial ''and operational'' objectives; i.e. that it: (1) can service both maturing short-term debt repayments, and scheduled long-term debt payments, and (2) has sufficient cash flow for ongoing and upcoming operational expenses. (See Financial management and

FP&A Financial planning and analysis (FP&A), in accounting and business, refers to the various integrated financial planning, planning, financial analysis, analysis, and Financial_modeling#Accounting, modeling activities aimed decision support, at sup ...

Public finance

20071203-Bush speech on budget Rose Garden

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 projects, financed and procured by a government body for recreational, employment, and health and safety uses in the greater community. They include public buildings ( municipal buildings, ...

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. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series of ...

banks in the

United States The United States of America (USA), also known as the United States (U.S.) or America, is a country primarily located in North America. It is a federal republic of 50 U.S. state, states and a federal capital district, Washington, D.C. The 48 ...

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 debt manager, and still one ...

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 Northwestern Europe, off the coast of European mainland, the 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 Development finance is a branch of development studies that deals with financing of economic and social development. It typically involves of both the mobilisation and dispersion of domestic and international sources of fiance. At the internationa ...

, which is related, concerns investment in

economic development In economics, economic development (or economic and social development) is the process by which the economic well-being and quality of life of a nation, region, local community, or an individual are improved according to targeted goals and object ...

projects provided by a (quasi) governmental institution on a non-commercial basis; these projects would otherwise not be able to get financing. 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 Revie ...

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 pri ...

projects: a private sector corporate provides the financing up-front, and then draws profits from taxpayers or users. Climate finance, and the related Environmental finance, address the financial strategies, resources and instruments used in

climate change mitigation Climate change mitigation (or decarbonisation) is action to limit the greenhouse gases in the atmosphere that cause climate change. Climate change mitigation actions include energy conservation, conserving energy and Fossil fuel phase-out, repl ...

Investment management

Stock Price Listing Numbers on a Korean Newspaper

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 in any Asset classes, asset class excluding capital stocks, Bond (finance), bonds, and cash. The term is a relatively loose ...

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 that is also an exchange-traded product, i.e., it is traded on stock exchanges. ETFs own financial assets such as stocks, Bond (finance), bonds, currencies, debts, futures contracts, and ...

, or

real estate investment trust A real estate investment trust (REIT, pronounced "reet") is a company that owns, and in most cases operates, income-producing real estate. REITs own many types of real estate, including office and apartment buildings, studios, warehouses, hos ...

s. At the heart of investment management is

asset allocation Asset allocation is the implementation of an investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio according to the investor's risk tolerance, goals and investm ...

— diversifying the exposure among these

asset classes In finance, an asset class is a group of marketable financial assets that have similar financial characteristics and behave similarly in the marketplace. These instruments can be distinguished as either having to do with real assets or having ...

, and among individual securities within each asset class—as appropriate to the client's

investment policy Within public finance, an investment policy is any government regulation or law that encourages or discourages foreign investment in the local economy, e.g. currency exchange limits. Explanation As globalization integrates the economies of ...

, 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-averse or risk tolerant / seeker * All classes of assets ...

). Here: *

Portfolio optimization Portfolio optimization is the process of selecting an optimal portfolio (asset distribution), out of a set of considered portfolios, according to some objective. The objective typically maximizes factors such as expected return, and minimizes c ...

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; Competition, competitors and Ma ...

is the approach typically applied in valuing and evaluating the individual securities. *

Technical analysis In finance, technical analysis is an analysis methodology for analysing and forecasting the direction of prices through the study of past market data, primarily price and volume. As a type of active management, it stands in contradiction to ...

is about forecasting future asset prices with past data. Overlaid is the portfolio manager's

investment style Investment style, is a term in investment management (and more generally, in finance), referring to how a characteristic investment philosophy is employed by an investor or fund manager.

—broadly, active vs

passive Passive may refer to: * Passive voice, a grammatical voice common in many languages, see also Pseudopassive * Passive language, a language from which an interpreter works * Passivity (behavior), the condition of submitting to the influence of ...

, value vs growth, and small cap vs. large cap—and

investment strategy In finance, an investment strategy is a set of rules, behaviors or procedures, designed to guide an investor's selection of an investment portfolio. Individuals have different profit objectives, and their individual skills make different tactics ...

. In a well-diversified portfolio, achieved

investment performance Investment performance is the return on an investment portfolio. The investment portfolio can contain a single asset or multiple assets. The investment performance is measured over a specific period of time and in a specific currency. Investors ...

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. Additional to this diversification, the fundamental risk mitigant employed, investment managers will apply various hedging techniques as appropriate, these may relate to the portfolio as a whole or to individual stocks. Bond portfolios are often (instead) 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 ' ...

, while for derivative portfolios and positions, traders use "the Greeks" to measure and then offset sensitivities. In parallel, managers – active and

– will monitor

tracking error In finance, tracking error or active risk is a measure of the risk in an investment portfolio that is due to active management decisions made by the portfolio manager; it indicates how closely a portfolio follows the index to which it is benchmar ...

, thereby minimizing and preempting any underperformance vs their "benchmark". A

quantitative fund A quantitative fund is an investment fund that uses Quantitative analysis (finance), quantitative investment management instead of fundamental human analysis. Investment process An Investment, investment process is classified as Quantitative ana ...

is managed using computer-based mathematical techniques (increasingly,

machine learning Machine learning (ML) is a field of study in artificial intelligence concerned with the development and study of Computational statistics, statistical algorithms that can learn from data and generalise to unseen data, and thus perform Task ( ...

) instead of human judgment. The actual trading is typically automated via sophisticated algorithms.

Risk management

Risk management Risk management is the identification, evaluation, and prioritization of risks, followed by the minimization, monitoring, and control of the impact or probability of those risks occurring. Risks can come from various sources (i.e, Threat (sec ...

, 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 managing exposure to financial risk - principally credit risk and market risk, with more specific variants as listed aside - as well ...

is the practice of protecting corporate value against

financial risk Financial risk is any of various types of risk associated with financing, including financial transactions that include company loans in risk of default. Often it is understood to include only downside risk, meaning the potential for financi ...

s, often by "hedging" exposure to these using financial instruments. The focus is particularly on credit and market risk, and in banks, through regulatory capital, includes operational risk. *

Credit risk Credit risk is the chance that a borrower does not repay a loan In finance, a loan is the tender of money by one party to another with an agreement to pay it back. The recipient, or borrower, incurs a debt and is usually required to pay ...

is the 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 m ...

relates to losses arising from movements in market variables such as prices and exchange rates; *

Operational risk Operational risk is the risk of losses caused by flawed or failed processes, policies, systems or events that disrupt business operations. Employee errors, criminal activity such as fraud, and physical events are among the factors that can tri ...

relates to failures in internal processes, people, and systems, or to external events (these risks will often be insured). 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 Provisioning may refer to: * Provisioning (technology), the equipping of a telecommunications network or IT resources * Provisioning (cruise ship), supplying a vessel for an extended voyage ** Provisioning of USS ''Constitution'' * Provisionin ...

. 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, and value for money represents an assessment of whether financial or other resources are ...

, 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 typi ...

, 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, resources ...

. 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 with what actually happens. For example, a company might Estimation, estimate their revenue in the next year, then compare it against the ...

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, which also falls under and directly relates to the umbrella term, data sc ...

and performance monitoring. (See ALM and

treasury management Treasury management (or treasury operations) entails management of an enterprise's financial holdings, focusing on the firm's liquidity, and mitigating its financial-, operational- and reputational risk. Treasury Management's scope thus inclu ...

.) 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 In finance, mainly for financial services firms, economic capital (ecap) is the amount of risk capital, assessed on a realistic basis, which a firm requires to cover the risks that it is running or collecting as a going concern, such as market ...

, and

under

Basel III Basel III is the third of three Basel Accords, a framework that sets international standards and minimums for bank capital requirements, Stress test (financial), stress tests, liquidity regulations, and Leverage (finance), leverage, with the goa ...

. The calculations here are mathematically sophisticated, and within the domain of

as below. Credit risk is inherent in the business of banking, but additionally, these institutions are exposed to

counterparty credit risk Credit risk is the chance that a borrower does not repay a loan or fulfill a loan obligation. For lenders the risk includes late or lost interest and principal payment, leading to disrupted cash flows and increased collection costs. The loss ...

. Banks typically employ Middle office "Risk Groups", whereas front office risk teams provide risk "services" (or "solutions") to customers.

Insurers 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 protect ...

manage their own risks with a focus on

solvency Solvency, in finance or business, is the degree to which the current assets of an individual or entity exceed the current liabilities of that individual or entity. Solvency can also be described as the ability of a corporation to meet its long- ...

and the ability to pay claims: Life Insurers are concerned more with

longevity risk A longevity risk is any potential risk attached to the increasing life expectancy of pensioners and policy holders, which can eventually result in higher pay-out ratios than expected for many pension funds and insurance companies. One important ...

and

interest rate risk Interest rate risk is the risk that arises for bond owners from fluctuating 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 ...

; Short-Term Insurers (

Property Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depending on the nature of the property, an owner of property may have the right to consume, alter, share, re ...

Health Health has a variety of definitions, which have been used for different purposes over time. In general, it refers to physical and emotional well-being, especially that associated with normal functioning of the human body, absent of disease, p ...

Casualty Casualty may refer to: *Casualty (person), a person who is killed or rendered unfit for service in a war or natural disaster **Civilian casualty, a non-combatant killed or injured in warfare * The emergency department of a hospital, also known as ...

) emphasize catastrophe- and claims volatility risks. For expected claims reserves are set aside periodically, while to absorb unexpected losses, a minimum level of capital is maintained.

Quantitative finance

Dojima-Rice-Exchange-Osaka-by-Yoshimitsu-Sasaki

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

. This area generally underpins a bank's customer-driven derivatives business—delivering bespoke OTC-contracts and "exotics", and

designing A design is the concept or proposal for an object, process, or system. The word ''design'' refers to something that is or has been intentionally created by a thinking agent, and is sometimes used to refer to the inherent nature of something ...

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 managing exposure to financial risk - principally credit risk and market risk, with more specific variants as listed aside - as well ...

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 and statistical methods in finance and investment management. Those working in the field are quantitative analysts (quants). Quants tend to specialize in specific areas which may include derivative ...

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 or short in markets. The difference between short trading and long-term investing is in the opposite approach and principles. Going shor ...

formulation, and in automated trading,

high-frequency trading High-frequency trading (HFT) is a type of algorithmic trading in finance characterized by high speeds, high turnover rates, and high order-to-trade ratios that leverages high-frequency financial data and electronic trading tools.Lin, Tom C. W. " ...

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 Security (finance), securities, usually consisting of baskets of fifteen stocks or more that are executed by a computer program simultaneously based on predetermined conditions. Program trading is often us ...

Financial theory

Financial theory is studied and developed within the disciplines of

management Management (or managing) is the administration of organizations, whether businesses, nonprofit organizations, or a Government agency, government bodies through business administration, Nonprofit studies, nonprofit management, or the political s ...

, (financial)

economics Economics () is a behavioral science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and interac ...

accountancy Accounting, also known as accountancy, is the process of recording and processing information about economic entities, such as businesses and corporations. Accounting measures the results of an organization's economic activities and conveys ...

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 a ...

. In the abstract, ''finance'' is concerned with the investment and deployment of

s and liabilities over "space and time"; i.e., it is about performing valuation and

today, based on the risk and uncertainty of future outcomes while appropriately incorporating the

time value of money The time value of money refers to the fact that there is normally a greater benefit to receiving a sum of money now rather than an identical sum later. It may be seen as an implication of the later-developed concept of time preference. The time ...

. Determining the

present value In economics and finance, present value (PV), also known as present discounted value (PDV), 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 ha ...

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. 2012As financial theory has roots in many disciplines, including mathematics, statistics, economics, physics, and psychology, it can be considered a mix of an

art Art is a diverse range of cultural activity centered around ''works'' utilizing creative or imaginative talents, which are expected to evoke a worthwhile experience, generally through an expression of emotional power, conceptual ideas, tec ...

and

science Science is a systematic discipline that builds and organises knowledge in the form of testable hypotheses and predictions about the universe. Modern science is typically divided into twoor threemajor branches: the natural sciences, which stu ...

, and there are ongoing related efforts to organize a list of unsolved problems in finance.

Managerial finance

Managerial financeWhat is managerial finance?
,

Corporate Finance Institute Corporate Finance Institute (CFI) is an online training and education platform for investment management, finance and investment professionals based in Vancouver Canada. It provides courses and certifications in financial modeling, valuation (fin ...

is the branch of finance that deals with the financial aspects of the

of a company, and the financial dimension of managerial decision-making more broadly. 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 A business school is a higher education institution or professional school that teaches courses leading to degrees in business administration or management. A business school may also be referred to as school of management, management school, s ...

finance departments, in

, 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 ...

. The tools addressed and developed relate in the main to managerial accounting and

: the former allow management to better understand, and hence act on, financial information relating to

profitability In economics, profit is the difference between revenue that an economic entity has received from its outputs and total costs of its inputs, also known as surplus value. It is equal to total revenue minus total cost, including both Explicit co ...

and performance; the latter, as above, are about optimizing the overall financial structure, including its impact on working capital. Key aspects of managerial finance thus include: # Financial planning and forecasting # Capital budgeting # Capital structure # Working capital management # Risk management # Financial analysis and reporting. The discussion, however, extends to

business strategy 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 resources and an assessment of ...

more broadly, emphasizing alignment with the company's overall strategic objectives; and similarly incorporates the managerial perspectives of planning, directing, and controlling.

Financial economics

Financial economicsFor an overview, se
"Financial Economics"
, William F. Sharpe (Stanford University manuscript) is the branch of

that studies the interrelation of financial variables, such as

price A price is the (usually not negative) quantity of payment or compensation expected, required, or given by one party to another in return for goods or services. In some situations, especially when the product is a service rather than a ph ...

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, ...

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 or Apple, apples. Services are activities provided by other people, such as teachers or barbers. Taken together, it is the Production (economics), production, distributio ...

. It thus centers on pricing, decision making, and risk management in the

financial market A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities include stocks and bonds, raw materials and precious metals, which are known in the financial marke ...

s, and produces many of the commonly employed

financial model Financial modeling is the task of building an abstract representation (a model) of a real world financial situation. This is a mathematical model designed to represent (a simplified version of) the performance of a financial asset or portfolio o ...

s. (

Financial econometrics Financial econometrics is the application of statistical methods to financial market data. Financial econometrics is a branch of financial economics, in the field of economics. Areas of study include capital markets, financial institutions, corpo ...

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 interrelated Price, pricing principles, outlined below, together with the resultant models. There have been many models developed for different situations, ...

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 traditionally defined as the "commitment of resources into something expected to gain value over time". If an investment involves money, then it can be defined as a "commitment of money to receive more money later". From a broade ...

applied in asset management. The analysis essentially explores how rational investors would apply risk and return to the problem of

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-free, and for a market to be complete. An a ...

". Here, the twin assumptions of

rationality Rationality is the quality of being guided by or based on reason. 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 The efficient-market hypothesis (EMH) is a hypothesis in financial economics that states that asset prices reflect all available information. A direct implication is that it is impossible to "beat the market" consistently on a risk-adjusted basi ...

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 In finance, a price (premium) is paid or received for purchasing or selling options. The calculation of this premium will require sophisticated mathematics. Premium components This price can be split into two components: intrinsic value, and ...

. 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 Bank run#Systemic banki ...

—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 ...

" (

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 "produ ...

, "theory of investment value", and

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 cost ...

). 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 mathematicsResearch Area: Financial Mathematics and Engineering
, Society for Industrial and Applied Mathematics is the field of

concerned with

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 (polity), state. In the case of its broad associative definition, government normally consists of legislature, executive (government), execu ...

, and

-securities. As

above Above may refer to: *Above (artist) Tavar Zawacki (b. 1981, California) is a Polish, Portuguese - American abstract artist and internationally recognized visual artist based in Berlin, Germany. From 1996 to 2016, he created work under the ...

, 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 an imitative representation of a process or system that could exist in the real world. In this broad sense, simulation can often be used interchangeably with model. Sometimes a clear distinction between the two terms is made, in ...

, and

partial differential equation In mathematics, a partial differential equation (PDE) is an equation which involves a multivariable function and one or more of its partial derivatives. The function is often thought of as an "unknown" that solves the equation, similar to ho ...

s; see aside boxed discussion re the prototypical Black-Scholes model and the various numeric techniques now applied * for risk management,See generally, Roy E. DeMeo (N.D.
Quantitative Risk Management: VaR and Others

value at risk Value at risk (VaR) is a measure of the risk of loss of investment/capital. 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 us ...

stress testing Stress 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, often to a breaking point, in orde ...

and "sensitivities" analysis (applying the "greeks"); the underlying mathematics comprises mixture models, 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 each ...

(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 "

". The subject has a close relationship with financial economics, which, as outlined, 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 an abstract and concrete, abstract description of a concrete system using mathematics, mathematical concepts and language of mathematics, language. The process of developing a mathematical model is termed ''mathematical m ...

s suggested.

Computational finance Computational finance is a branch of applied computer science that deals with problems of practical interest in finance.Rüdiger U. Seydel, ''Tools for Computational Finance'', Springer; 3rd edition (May 11, 2006) 978-3540279235 Some slightly diff ...

is the branch of (applied)

computer science Computer science is the study of computation, information, and automation. Computer science spans Theoretical computer science, theoretical disciplines (such as algorithms, theory of computation, and information theory) to Applied science, ...

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 manipulations) for the problems of mathematical analysis (as distinguished from discrete mathematics). It is the study of numerical methods t ...

applied here.

Experimental finance

Experimental finance The goals of experimental finance are to understand human and market behavior in settings relevant to finance. Experiments are synthetic economic environments created by researchers specifically to answer research questions. This might involve, for ...

Bloomfield, 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 is the study of the psychological (e.g. cognitive, behavioral, affective, social) factors involved in the decisions of individuals or institutions, and how these decisions deviate from those implied by traditional economi ...

studies how the ''

psychology Psychology is the scientific study of mind and behavior. Its subject matter includes the behavior of humans and nonhumans, both consciousness, conscious and Unconscious mind, unconscious phenomena, and mental processes such as thoughts, feel ...

'' 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. Nowadays there is a need for more theory and testing of the effects of feelings on financial decisions. Especially, because now the time has come to move beyond behavioral finance to social finance, which studies the structure of social interactions, how financial ideas spread, and how social processes affect financial decisions and outcomes. 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 Quantitative behavioral finance is a new discipline that uses mathematical and statistical methodology to understand behavioral biases in conjunction with valuation. The research can be grouped into the following areas: # Empirical studies that d ...

, which uses mathematical and statistical methodology to understand behavioral biases in conjunction with valuation.

Quantum finance

Quantum finance involves applying quantum mechanical approaches to financial theory, providing novel methods and perspectives in the field. ''Quantum'' ''finance'' is an interdisciplinary field, in which theories and methods developed by ''quantum'' physicists and economists are applied to solve financial problems. It represents a branch known as econophysics. 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 Finance theory is heavily based on

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 instrument at a specified strike price on or before a specified ...

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 that deals with problems of practical interest in finance.Rüdiger U. Seydel, ''Tools for Computational Finance'', Springer; 3rd edition (May 11, 2006) 978-3540279235 Some slightly diff ...

. 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 beginning of state formation and trade during the

Bronze Age The Bronze Age () was a historical period characterised principally by the use of bronze tools and the development of complex urban societies, as well as the adoption of writing in some areas. The Bronze Age is the middle principal period of ...

. The earliest historical evidence of finance is dated to around 3000 BCE. Banking originated in

West Asia West Asia (also called Western Asia or Southwest Asia) is the westernmost region of Asia. As defined by most academics, UN bodies and other institutions, the subregion consists of Anatolia, the Arabian Peninsula, Iran, Mesopotamia, the Armenian ...

, 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, the archeological site known today as Warka, was an ancient city in the Near East, located east of the current bed of the Euphrates River, on an ancient, now-dried channel of the river in Muthanna Governorate, Iraq. The site lies 93 kilo ...

Mesopotamia Mesopotamia is a historical region of West Asia situated within the Tigris–Euphrates river system, in the northern part of the Fertile Crescent. Today, Mesopotamia is known as present-day Iraq and forms the eastern geographic boundary of ...

supported trade by lending as well as the use of interest. In Sumerian, "interest" was ''mas'', which translates to "calf". In

Greece Greece, officially the Hellenic Republic, is a country in Southeast Europe. Located on the southern tip of the Balkan peninsula, it shares land borders with Albania to the northwest, North Macedonia and Bulgaria to the north, and Turkey to th ...

and

Egypt Egypt ( , ), officially the Arab Republic of Egypt, is a country spanning the Northeast Africa, northeast corner of Africa and Western Asia, southwest corner of Asia via the Sinai Peninsula. It is bordered by the Mediterranean Sea to northe ...

, 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 during 1755–1750 BC. It is the longest, best-organized, and best-preserved legal text from the ancient Near East. It is written in the Old Babylonian dialect of Akkadian language, Akkadi ...

(1792–1750 BCE) included laws governing banking operations. The Babylonians were accustomed to charging interest at the rate of 20 percent per year. By 1200 BCE,

cowrie Cowrie or cowry () is the common name for a group of small to large sea snails in the family Cypraeidae. Cowrie shells have held cultural, economic, and ornamental significance in various cultures. The cowrie was the shell most widely used wo ...

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. With population of China, a population exceeding 1.4 billion, it is the list of countries by population (United Nations), second-most populous country after ...

. The use of coins as a means of representing money began in the years between 700 and 500 BCE. Herodotus mentions the use of crude coins in

Lydia Lydia (; ) was an Iron Age Monarchy, kingdom situated in western Anatolia, in modern-day Turkey. Later, it became an important province of the Achaemenid Empire and then the Roman Empire. Its capital was Sardis. At some point before 800 BC, ...

around 687 BCE and, by 640 BCE, the Lydians had started to use coin money more widely and opened permanent retail shops. Shortly after, cities in

Classical Greece Classical Greece was a period of around 200 years (the 5th and 4th centuries BC) in ancient Greece,The "Classical Age" is "the modern designation of the period from about 500 B.C. to the death of Alexander the Great in 323 B.C." ( Thomas R. Mar ...

, such as

Aegina Aegina (; ; ) is one of the Saronic Islands of Greece in the Saronic Gulf, from Athens. Tradition derives the name from Aegina (mythology), Aegina, the mother of the mythological hero Aeacus, who was born on the island and became its king. ...

Athens Athens ( ) is the Capital city, capital and List of cities and towns in Greece, largest city of Greece. A significant coastal urban area in the Mediterranean, Athens is also the capital of the Attica (region), Attica region and is the southe ...

, and

Corinth Corinth ( ; , ) is a municipality in Corinthia in Greece. The successor to the ancient Corinth, ancient city of Corinth, it is a former municipality in Corinthia, Peloponnese (region), Peloponnese, which is located in south-central Greece. Sin ...

, started minting their own coins between 595 and 570 BCE. During the

Roman Republic The Roman Republic ( ) was the era of Ancient Rome, classical Roman civilisation beginning with Overthrow of the Roman monarchy, the overthrow of the Roman Kingdom (traditionally dated to 509 BC) and ending in 27 BC with the establis ...

, interest was outlawed by the ''Lex Genucia'' reforms in 342 BCE, though the provision went largely unenforced. Under

Julius Caesar Gaius Julius Caesar (12 or 13 July 100 BC – 15 March 44 BC) was a 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 Caesar's civil wa ...

, a ceiling on interest rates of 12% was set, and much later under

Justinian Justinian I (, ; 48214 November 565), also known as Justinian the Great, was Roman emperor from 527 to 565. His reign was marked by the ambitious but only partly realized ''renovatio imperii'', or "restoration of the Empire". This ambition was ...

it was lowered even further to between 4% and 8%. The first stock exchange was opened in

Antwerp Antwerp (; ; ) is a City status in Belgium, city and a Municipalities of Belgium, municipality in the Flemish Region of Belgium. It is the capital and largest city of Antwerp Province, and the third-largest city in Belgium by area at , after ...

in 1531. Since then, popular exchanges such as the

London Stock Exchange The London Stock Exchange (LSE) is a stock exchange based in London, England. the total market value of all companies trading on the LSE stood at US$3.42 trillion. Its current premises are situated in Paternoster Square close to St Paul's Cath ...

(founded in 1773) and the

New York Stock Exchange The New York Stock Exchange (NYSE, nicknamed "The Big Board") is an American stock exchange in the Financial District, Manhattan, Financial District of Lower Manhattan in New York City. It is the List of stock exchanges, largest stock excha ...

(founded in 1793) were created.

Notes

References

External links

Hypertextual Finance Glossary
(

Campbell Harvey Campbell Russell "Cam" Harvey (born June 23, 1958) is a Canadian economist, known for his work on asset allocation with changing risk and risk premiums and the problem of separating luck from skill in investment management. He is currently the J. ...

)
Finance Glossary
(

Pierre Vernimmen Pierre Vernimmen (12 April 1946 – 28 December 1996) was a French economist, professor at the HEC Paris and director of the consulting department of the Paribas investment bank. He was the author of ''Finance d'Entreprise'', a reference manu ...

)
Glossary of financial risk management terms
( Risk.net)
Glossary of Key Investment Terms
(

PIMCO Pacific Investment Management Company LLC (PIMCO) is an American investment management firm. While it has a specific focus on active fixed income management worldwide, it manages investments in many asset classes, including fixed income, share ca ...

)
Corporate finance resources
(

Aswath Damodaran Aswath Damodaran (born 24 September 1957), is an Indian-American Professor of Finance at the Stern School of Business at New York University (Kerschner Family Chair in Finance Education). He is well known as the author of several widely used ac ...

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Financial management resources
( James Van Horne)
Personal finance resources
(

Financial Literacy and Education Commission The Financial Literacy and Education Commission (the Commission) was established under Title V, the Financial Literacy and Education Improvement Act which was part of the Fair and Accurate Credit Transactions Act (FACT) Act of 2003, to improve fin ...

, mymoney.gov)
Public finance resources
(Governance and Social Development Resource Centre, gsdrc.org) []
Risk management resources
(Global Risk Institute) {{Authority control

The financial system

Areas of finance

Personal finance

Corporate finance

Public finance

Investment management

Risk management

Quantitative finance

Financial theory

Managerial finance

Financial economics

Financial mathematics

Experimental finance

Behavioral finance

Quantum finance

History of finance

See also

Notes

References

Further reading

External links