Finance is a broad term covering a variety of things about the science, development, and organization of money and other financial assets. In particular, it covers the questions of why and how an individual, business or governmental entity gets the funds required to operate their activities and the decisions that they make as to how those funds are used. The study of how finances impact society is known as economics. The discipline also includes such important areas as risk and budgeting. Economics students learn about the way people use and evaluate financial instruments, the methods by which economic decisions are made, and the consequences of those decisions.
Private financial services include bank loans, securities transactions, leasing financial instruments, buying financial instruments, creating financial instruments, trading in financial instruments, and hedge funds. The study of public finance relates to the responsibilities and benefits of government institutions and their role in assisting the economic recovery of the nation. Examples of these institutions are national banks and credit unions, municipal financial services, central banks, sovereign monetary authorities, and international trade associations. Public finance discusses the policies that government entities take to support the nation’s economy and the effects that those policies have on the nation as a whole and on the specific institutions that are part of the economy.
Some of the major components of the discipline are asset management, risk management, taxes, economics, and globalization. Asset management is the process by which an organization creates and implements an inventory system to track and assess the value of its financial assets. Asset management also involves the evaluation of an organizations’ risk profile, with the goal of reducing that risk. Examples of public finance types of asset management are inventory systems, worker compensation, financial rating, corporate credit, bank lending, and tax collections. Another important area of public finance is budgeting. This area of study looks at the decisions made by government agencies and organizations in managing the resources of the nation.
One of the most recognized areas of the discipline is banking. It is the backbone of the financial system, providing the lender with the resources they need to facilitate commerce. Banking represents a broad range of activities, including commodity trading, saving, lending, securities purchase and selling, banking guarantees, and insurance products. Within banking there are three main categories: commercial banking, investment banking, and treasury banking. Commercial banking refers to the activities related to making loans to other businesses; investment banking focuses on the activities related to securities trading; and treasury banking concentrates on the activities related to providing cash to other financial institutions. Many countries have created special financial products such as the Tobin tax, under which a certain amount of the profits from banking activities is exempt from taxation.
Finance is intimately connected with economics and the study of how different economic policies affect the production, distribution, and spending of resources. Many scholars of finance theorize that contemporary economic problems are the product of distorted incentives or the failure of social capital. Social capital refers to those attributes that lead people to properly allocate resources in a way that maximizes the societal benefit. Theory of social investment aims to understand the role of finance in realizing the public good through the efficient allocation of resources.
A wide variety of financial instruments are included in the field of public finance. The most familiar of these are money and credit, banking, fiscal policy, budgeting, and direct monetary policy. Other instruments considered in public finance include patents, corporate bonds, derivatives, foreign trade, public infrastructure, pension funds, mergers and acquisitions, and ownership of property and securities.