Finance is a broad term for things about the science, creation, management, and studies of money and financial investments. In general, it includes the questions of why and how an individual, institution or government obtain the funds necessary to operate normally, including its utilization, in terms of its income, assets, liabilities, and growth or deterioration. Finance has many theoretical elements as well as applications in our current society. It is used to determine the financial worth of a business or institution and the strategies used to optimize return on investment (ROI). It is also used to determine the optimal taxation of corporations and individuals, to determine the risk/reward balance required for banking and other commercial activities, and to ensure adequate protection and insurance against catastrophes such as fires, earthquakes and terrorism.
The study of finance is a branch of economics. In the United States, most economic activity is related to banking, although other types of financial institutions are found in various countries. Business cycles are primarily affected by changes in the availability of credit. Changes in interest rates affecting the supply of credit to create short-term fluctuations in the cost of borrowing money, which are known as monetary effects. These effects are usually temporary and, as long as supply conditions are fixed, they have little effect on the economy as a whole.
Unlike traditional economics, modern economics does not view business and investment practices merely from the point of view of profits, losses, taxes and savings. The study of finance focuses on the method by which funds are invested, the rate of return, and the institutions that provide those funds, including banking systems and financial markets. Finance is part of macroeconomics, which studies broader economic issues. For example, it can be studied to explain why certain economic policies, such as economic protection, lead to successful industries or why tax policies affect the distribution of income.
Unlike traditional economics, modern finance provides a number of complex tools for the analysis of economic systems. One such tool is the theory of asset pricing, which determines the interest people will pay for different financial assets. Another useful tool for studying the interrelationship between various economic factors is the concept of financial risk. This concept describes how the risk of failing to return funds to investors is evaluated by banking systems, including interest rates and the credit rating of the financial system.
Because of the complex interrelationship of the financial markets and the financial system, finance is a very difficult and demanding subject. Its concepts and methods are as varied as the individuals who study them. Finance graduates may choose to specialize in one of several fields of study, such as banking, economics, investment, or public policy. All of these areas require extensive training, but those specializing in one field to learn the most about the topic.
A degree in finance allows students to understand the workings of the capital markets. They will also learn the concepts and tools used in banking, as well as how the different institutions interact with each other and with other countries. Those students planning on entering the professional world should also be prepared to become highly skilled managers. Graduates can seek employment in financial planning agencies, investment banks, accounting firms, or other finance-related organizations. For those already working in finance, the choice of advanced education often indicates an ability to rise quickly through the ranks of the company.