Finance is a broad term encompassing things about the study, generation, and organization of funds and financial assets. The study or management of financial resources is often done through banks, saving and investment clubs, and by private individuals. The word “finance” itself comes from the Latin words meaning “a craftsmanship concerned with money.” As such, one can safely assume that there is an immense interest and connection between learning about the study of finance and becoming rich or wealthy. In fact, as much of modern society is based on finance and how to utilize financial resources to make money, one would also be hard pressed to find a field of study which is not intrinsically related to finance.
Let’s begin by examining the subject of behavioral finance, which deals largely with the analysis of behavior, decisions, and reactions to monetary and credit policies. Behavioral finance is one of the most important areas of study in all of finance, and can be directly related or independent of economics. The main article below describes the main areas of focus of behavioral finance. In this main article, we will not discuss primary factors, as these have already been discussed extensively in many different sources.
Behavior is basically the observation of financial situations over time. This can be done at the individual level or at the aggregate level of society as a whole. Behavioral finance is also known as human capital management, asset allocation, or risk aversion. Behavioral decisions are not random or self-induced; instead they are made as a result of expected future outcomes from various financial decisions. For instance, if a business owner expects to make a profit over the course of one year, they will make financial decisions based on their expectations of the amount of profit that they will earn and the amount of loss that they will incur, regardless of the effect that these decisions will have on their customers or other individuals that might acquire their goods and services.
The study of financial decisions and practices in organizations, their interrelationships, and the modeling of behavioral securities, is known as economic theory. While most of the work in financial accounting is descriptive rather than accounting (it deals with measuring, classifying, summarizing, and interpreting data), a small portion of the studies is predictive of future market outcomes. Most empirical research in the area of business finance is predictive of the behavior of individual investors, because of the information necessary to allow managers to make informed decisions about resource allocation.
The practice of using financial statements for credit risk, capital budgeting, and liquidity contingency planning is known as accountancy. Financial accounting includes valuing the instruments of accounts that are involved in the process of creating financial statements. An accountancy process also includes valuing the intangible assets of a firm and classifying them as well. A firm’s internal financing and its exposure to external financing are also taken into account. Finally, the impact of changing market conditions on the balance of cash and liquid assets is also analyzed. This process is known as strategic management.
The major areas of finance research and development are interest rates, portfolio optimization, derivatives, insurance, investment banking, corporate finance, personal finance, asset allocation, venture capital, and foreign exchange. All of these areas of finance are affected by credit, money, and credit risks. One of the biggest influences on international finance is the U.S. dollar. International finance research seeks to improve the understanding of how foreign exchange markets affect U.S. Dollar value, allowing managers to better understand why certain policies are adopted or not. In addition, this knowledge provides insight into the cause and effect of disasters, such as earthquakes, hurricanes, and financial catastrophes.
