Finance is a broad term encompassing all matters concerning the economic development, production, and management of funds and securities. It involves the study of financial systems and principles, analyzing the risk related to financial instruments, and applying techniques to reduce the risk of loss and value through the use of effective management and strategies. There are many fields of finance. They include: banking, economics, public economics, private equity, venture capital, mortgage banking, asset management, commodity markets, the stock market, and international finance. Other areas of specialization within finance are tax, economic policy, real estate, personal and corporate finance.
All the financial markets or aspects in the economy depend on the functioning of finance. The central bank usually controls the supply of funds and the interest rates in the economy through various techniques such as interest rate management, price stabilization, and various programs to promote credit growth. Changes in financing due to change in financial systems or conditions may have adverse effects on the economy, so the stability of finance is essential for the smooth functioning of the economy.
Behavioral finance is the study of individual decisions made in relation to their own personal and economic outcomes. Behavioral economics tries to understand the underlying reasons for individual decisions and investment choices and how these choices affect the external environment. Various economic theories of behavioral finance attempt to describe why people behave in certain ways and how they can be predicted and influenced by future events.
Finances is also related to the financial management of resources which could be termed as non-financial assets. A firm needs capital for its growth and expansion. The availability of funds is not sufficient to meet the demands of the expanding business so capital investments are taken by various means such as borrowing funds from banks or from other financial institutions, using financial tools such as bonds, stocks, derivatives, securities, and financial products, and finally using the real estate as a source of collateral for loans. This entire process of borrowing, investing, creating control, and using assets brings us close to the definition of finance.
The study of the role of finance in the overall economy is known as macroeconomics. The study of microeconomics is much narrower in scope and concerns itself with issues that are specific to a country or region. Its major topics are specifically related to the analysis of particular firms and the sector in which they operate. For example, national credit policy, regulation of financial institutions, budget deficits and surpluses, and the role of banks in the economy are some of the macroeconomic issues that are considered. The main areas of microeconomics are interest rates, savings and investment, industrial productivity and business cycles.
Another important topic of modern day economics is the area of cash flow. Cash flow is essentially money moving out of the economy in the form of flows into it. In short, all the money that leaves the economy has to be matched with money that comes in. Therefore, advances in technology and globalization mean that there is an increasing need for capital, as well as cash. This cash can be used for purchases, either by businesses or individuals, or can be directed into long term investments, such as those made by banks on businesses’ behalf, that yield a higher rate of return.