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"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created for transacting and trading assets, liabilities, and risks. Finance is conceptualized, structured, and regulated by a complex system of power relations within political economies across state and global markets. Finance is both art (e.g. product development) and science (e.g. measurement), although these activities increasingly converge through the intense technical and institutional focus on measuring and hedging risk-return relationships that underlie shareholder value. Networks of financial businesses exist to create, negotiate, market, and trade in evermore-complex financial products and services for their own as well as their clients’ accounts. Financial performance measures assess the efficiency and profitability of investments, the safety of debtors’ claims against assets, and the likelihood that derivative instruments will protect investors against a variety of market risks
The financial system consists of public and private interests and the markets that serve them. It provides capital from individual and institutional investors who transfer money directly and through intermediaries (e.g. banks, insurance companies, brokerage and fund management firms) to other individuals, firms, and governments that acquire resources and transact business. With the expectation of reaping profits, investors fund credit in the forms of (1) debt capital (e.g. corporate and government notes and bonds, mortgage securities and other credit instruments), (2) equity capital (e.g. listed and unlisted company shares), and (3) the derivative products of a wide variety of capital investments including debt and equity securities, property, commodities, and insurance products. Although closely related, the disciplines of economics and finance are distinctive. 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. Economists make a number of abstract assumptions for purposes of their analyses and predictions. They generally regard financial markets that function for the financial system as an efficient mechanism. In practice, however, emerging research is demonstrating that such assumptions are unreliable. Instead, financial markets are subject to human error and emotion New research discloses the mischaracterization of investment safety and measures of financial products and markets so complex that their effects, especially under conditions of uncertainty, are impossible to predict. The study of finance is subsumed under economics as finance economics, but the scope, speed, power relations and practices of the financial system can uplift or cripple whole economies and the well-being of households, businesses and governing bodies within them—sometimes in a single day.
Three overarching divisions exist within the academic discipline of finance and its related practices: 1) personal finance: the finances of individuals and families concerning household income and expenses, credit and debt management, saving and investing, and income security in later life, 2) corporate finance: the finances of for-profit organizations including corporations, trusts, partnerships and other entities, and 3) public finance: the financial affairs of domestic and international governments and other public entities. Areas of study within (and the interactions among) these three levels affect all dimensions of social life: politics, taxes, art, religion, housing, health care, poverty and wealth, consumption, sports, transportation, labor force participation, media, and education. While each has a vast accumulated literature of its own, the effects of macro and micro level financing that mold and impact these and other domains of human and societal life typically have been treated by researchers as “policy,” “welfare,” “work,” “stratification,” and so forth, or have been largely unexplored. Recent research in "behavioral finance" is promising, albeit a relative newcomer, to the existing body of financial research that focuses primarily on measurement.
Loans have become increasingly packaged for resale, meaning that an investor buys the loan (debt) from a bank or directly from a corporation. Bonds are debt instruments sold to investors for organizations such as companies, governments or charities. The investor can then hold the debt and collect the interest or sell the debt on a secondary market. Banks are the main facilitators of funding through the provision of credit, although private equity, mutual funds, hedge funds, and other organizations have become important as they invest in various forms of debt. Financial assets, known as investments, are financially managed with careful attention to financial risk management to control financial risk. Financial instruments allow many forms of securitized assets to be traded on securities exchanges such as stock exchanges, including debt such as bonds as well as equity in publicly traded corporations.
Central banks, such as the Federal Reserve System banks in the United States and Bank of England in the United Kingdom, are strong players in public finance, acting as lenders of last resort as well as strong influences on monetary and credit conditions in the economy.