Finance is a broad term for various things about the study, development, management, and implementation of financial investments and money. It is usually dealt with as part of economics but it also covers other non-monetary considerations such as risks and rewards. It basically deals with the ways in which monetary values are produced and how these get transferred to real goods and services for consumption and generation of value. For example, in the production of capital goods, such as machinery or automobiles, finance develops the processes through which money is lent; how these get deployed and the manner in which profits are earned by the firm that lends them.
There are many schools of thought on the definition and concepts of finance. These include classical economics, monetarism, microeconomics, engineering economics, behavioral economics and planning theory. The main feature of any school of thought on the matter is that it attempts to provide a detailed description and analysis of financial markets. However, because of its broad scope it has developed many alternative approaches and some of these have been incorporated into modern day economics.
Classical economics is the dominant strand of today’s modern financial theories and the home of many of the fundamental economic concepts. This tradition attributes the creation of money to the self-interest of individuals and banks. In this system, private individuals lend money to enterprises in return for a pre-determined amount of wealth. The funds that are raised are used primarily to finance growth or capacity utilization in the economy. Although classical economics provides the basis for most modern financial theories, it also diverges from it in numerous respects, especially in the area of time preference.
A branch of modern financial theory that emerged in the last century is behavioral finance. This school of thought traces its origins to the Great Depression of the 1930s. Its aim is to explain why people make investment decisions that are in their best interest, even when this means choosing to save rather than spending their income on unproductive activities. Behavioral finance attempts to overcome the shortcomings of classical economics as well as the inconsistencies found within the current understanding of how money is made and saved.
Modern finance encompasses a wide range of natural phenomena. For example, the purchase of bonds, stocks, commodities and foreign exchange is all part of the process of creating wealth. Many of these processes, such as real estate investing, are considered to be “soft” investments, since they do not require a significant amount of physical storage or capital. Other types of hard assets, such as gold coins, may also be categorized as “hard” finance because of the potential return on investment they can provide.
Within the broader field of public finance, the term finance refers to any approach to managing resources that take advantage of current opportunities to increase capital stock at the appropriate time. As the name implies, this includes the strategies that managers use to take advantage of changes in company stock price to increase the availability of existing capital. In addition to using stock price to make investments, public finance also takes into account the effects of interest rate changes, inflation and reinvestment. The methods used to manage funds are referred to as financial instruments. There are many different types of financial instruments including stock market investment strategies, derivatives, bonds, mutual funds and more.