The investment banks find the initial investors and facilitate the listing of the securities, typically shares and bonds.Īdditionally, they facilitate the securities exchanges, which allow their trade thereafter, as well as the various service providers which manage the performance or risk of these investments. The financial intermediaries here are the investment banks. 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. Investing typically entails the purchase of stock, either individual securities, or via a mutual fund for example. Banks allow borrowers and lenders, of different sizes, to coordinate their activity. The bank then lends these deposits to borrowers. A bank accepts deposits from lenders, on which it pays interest. Ī bank aggregates the activities of many borrowers and lenders. The lender receives interest, the borrower pays a higher interest than the lender receives, and the financial intermediary earns the difference for arranging the loan. The lending is often indirect, through a financial intermediary such as a bank, or via the purchase of notes or bonds ( corporate bonds, government bonds, or mutual bonds) in the bond market. The owners of both bonds and stock may be institutional investors – financial institutions such as investment banks and pension funds – or private individuals, called private investors or retail investors. (ii) by a corporation selling equity, also called stock or shares (which may take various forms: preferred stock or common stock). (i) by borrowing in the form of a loan (private individuals), or by selling government or corporate bonds Correspondingly, an entity where income is less than expenditure can raise capital usually in one of two ways: In general, an entity whose income exceeds its expenditure can lend or invest the excess, intending to earn a fair return. Individuals, companies and governments must obtain money from some external source, such as loans or credit, when they lack sufficient funds to operate. Savers and investors have money available which could earn interest or dividends if put to productive use. "Finance" thus studies the process of channeling money from savers and investors to entities that need it. See also: Financial services, financial market, and Circular flow of incomeĪs above, the financial system consists of the flows of capital that take place between individuals ( personal finance), governments ( public finance), and businesses ( corporate finance).
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Given its wide scope, finance is studied in several academic disciplines, and, correspondingly, there are several related degrees and professional certifications that can lead to the field. Similarly, although these areas overlap the financial function of the accounting profession, financial accounting is the reporting of historical financial information, whereas finance is forward-looking. The economy is a social institution that organizes a society's production, distribution, and consumption of goods and services, all of which must be financed.
Asset allocation, the mix of investments in the portfolio, is also fundamental here.Īlthough they are closely related, the disciplines of economics and finance are distinct. Ī major focus within finance is thus investment management – called money management for individuals, and asset management for institutions – and finance then includes the associated activities of securities trading and stock broking, investment banking, financial engineering, and risk management.įundamental to these areas is the valuation of assets such as stocks, bonds, loans, but also, by extension, entire companies. I.e., the financial markets that allow the flow of money, via investments and other financial instruments, between and within these areas this "flow" is facilitated by the financial services sector.įinance therefore refers to the study of the securities markets, including derivatives, and the institutions that serve as intermediaries to those markets, thus enabling the flow of money through the economy. Īt the same time, and correspondingly, finance is about the overall "system" Finance is then often divided into the following broad categories: personal finance, corporate finance, and public finance. Specifically, it deals with the questions of how an individual, company or government acquires money – called capital in the context of a business – and how they spend or invest that money. Finance is a term for the management, creation, and study of money and investments.
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