Finance

Finance

Overview
"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.
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Encyclopedia
"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
Investor
An investor is a party that makes an investment into one or more categories of assets --- equity, debt securities, real estate, currency, commodity, derivatives such as put and call options, etc...

 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
Secondary market
The page applies to the finanical term; For the merchandising concept, see Aftermarket .The secondary market, also called aftermarket, is the financial market where previously issued securities and financial instruments such as stock, bonds, options, and futures are bought and sold....

. Banks are the main facilitators of funding through the provision of credit
Credit (finance)
Credit is the trust which allows one party to provide resources to another party where that second party does not reimburse the first party immediately , but instead arranges either to repay or return those resources at a later date. The resources provided may be financial Credit is the trust...

, although private equity
Private equity
Private equity, in finance, is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange....

, mutual funds, hedge funds, and other organizations have become important as they invest in various forms of debt. Financial asset
Asset
In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset...

s, known as investments, are financially managed
Investment management
Investment management is the professional management of various securities and assets in order to meet specified investment goals for the benefit of the investors...

 with careful attention to financial risk management
Financial risk management
Financial risk management is the practice of creating economic value in a firm by using financial instruments to manage exposure to risk, particularly credit risk and market risk. Other types include Foreign exchange, Shape, Volatility, Sector, Liquidity, Inflation risks, etc...

 to control financial risk
Financial risk
Financial risk an umbrella term for multiple types of risk associated with financing, including financial transactions that include company loans in risk of default. Risk is a term often used to imply downside risk, meaning the uncertainty of a return and the potential for financial loss...

. Financial instruments allow many forms of securitized
Securitization
Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations and selling said consolidated debt as bonds, pass-through securities, or Collateralized mortgage obligation , to...

 assets to be traded
Trader (finance)
A trader is someone in finance who buys and sells financial instruments such as stocks, bonds, commodities and derivatives. A broker who simply fills buy or sell orders is not a trader, as they are merely executing instructions given to them. According to the Wall Street Journal in 2004, a managing...

 on securities exchanges such as stock exchange
Stock exchange
A stock exchange is an entity that provides services for stock brokers and traders to trade stocks, bonds, and other securities. Stock exchanges also provide facilities for issue and redemption of securities and other financial instruments, and capital events including the payment of income and...

s, including debt
Debt
A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...

 such as bonds
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...

 as well as equity
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...

 in publicly traded corporations
Public company
This is not the same as a Government-owned corporation.A public company or publicly traded company is a limited liability company that offers its securities for sale to the general public, typically through a stock exchange, or through market makers operating in over the counter markets...

.

Central banks, such as the Federal Reserve System
Federal Reserve System
The Federal Reserve System is the central banking system of the United States. It was created on December 23, 1913 with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907...

 banks in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...

 and Bank of England
Bank of England
The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694, it is the second oldest central bank in the world...

 in the United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...

, are strong players in public finance, acting as lenders of last resort
Lender of last resort
A lender of last resort is an institution willing to extend credit when no one else will. The term refers especially to a reserve financial institution, most often the central bank of a country, intended to avoid bankruptcy of banks or other institutions deemed systemically important or 'too big to...

 as well as strong influences on monetary and credit conditions in the economy.

Overview of techniques and sectors of the financial industry


An entity whose income exceeds its expenditure can lend or invest the excess income. On the other hand, an entity whose income is less than its expenditure can raise capital by borrowing or selling equity claims, decreasing its expenses, or increasing its income. The lender can find a borrower, a financial intermediary
Financial intermediary
Financial intermediation consists of “channeling funds between surplus and deficit agents”. A financial intermediary is a financial institution that connects surplus and deficit agents...

 such as a bank
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...

, or buy notes or bonds in the bond market
Bond market
The bond market is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the Secondary market, usually in the form of bonds. The primary goal of the bond market is to provide a mechanism for long term funding of public and...

. The lender receives interest, the borrower pays a higher interest than the lender receives, and the financial intermediary earns the difference for arranging the loan.

A bank aggregates the activities of many borrowers and lenders. A bank accepts deposits from lenders, on which it pays interest. The bank then lends these deposits to borrowers. Banks allow borrowers and lenders, of different sizes, to coordinate their activity.

Finance is used by individuals (personal finance
Personal finance
Personal finance is the application of the principles of finance to the monetary decisions of an individual or family unit. It addresses the ways in which individuals or families obtain, budget, save, and spend monetary resources over time, taking into account various financial risks and future...

), by governments (public finance
Public finance
Public finance is the revenue and expenditure of public authoritiesThe purview of public finance is considered to be threefold: governmental effects on efficient allocation of resources, distribution of income, and macroeconomic stabilization.-Overview:The proper role of government provides a...

), by businesses (corporate finance
Corporate finance
Corporate finance is the area of finance dealing with monetary decisions that business enterprises make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximize shareholder value while managing the firm's financial risks...

) and by a wide variety of other organizations, including schools and non-profit organizations. In general, the goals of each of the above activities are achieved through the use of appropriate financial instruments and methodologies, with consideration to their institutional setting.

Finance is one of the most important aspects of business management and includes decisions related to the use and acquisition of funds for the enterprise.

In corporate finance, a company's capital structure
Capital structure
In finance, capital structure refers to the way a corporation finances its assets through some combination of equity, debt, or hybrid securities. A firm's capital structure is then the composition or 'structure' of its liabilities. For example, a firm that sells $20 billion in equity and $80...

 is the total mix of financing methods it uses to raise funds. One method is debt financing, which includes bank loans and bond sales. Another method is equity financing - the sale of stock by a company to investors, the original shareholders of a share. Ownership of a share gives the shareholder certain contractual rights and powers, which typically include the right to receive declared dividends and to vote the proxy on important matters (e.g., board elections). The owners of both bonds and stock, may be institutional investors - financial institutions such as investment banks and pension fund
Pension fund
A pension fund is any plan, fund, or scheme which provides retirement income.Pension funds are important shareholders of listed and private companies. They are especially important to the stock market where large institutional investors dominate. The largest 300 pension funds collectively hold...

s — or private individuals, called private investors or retail investors.

Personal finance



Questions in personal finance revolve around
  • How much money will be needed by an individual (or by a family), and when?
  • How can people protect themselves against unforeseen personal events, as well as those in the external economy?
  • How can family assets best be transferred across generations (bequests and inheritance)?
  • How does tax policy (tax subsidies or penalties) affect personal financial decisions?
  • How does credit affect an individual's financial standing?
  • How can one plan for a secure financial future in an environment of economic instability?


Personal financial decisions may involve paying for education, financing durable goods such as real estate
Real estate
In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...

 and cars, buying insurance
Insurance
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...

, e.g. health and property insurance, investing and saving for retirement
Retirement
Retirement is the point where a person stops employment completely. A person may also semi-retire by reducing work hours.Many people choose to retire when they are eligible for private or public pension benefits, although some are forced to retire when physical conditions don't allow the person to...

.

Personal financial decisions may also involve paying for a loan, or debt obligations.

Corporate finance



Managerial
Managerial finance
Managerial finance is the branch of finance that concerns itself with the managerial significance of finance techniques. It is focused on assessment rather than technique....

 or corporate finance
Corporate finance
Corporate finance is the area of finance dealing with monetary decisions that business enterprises make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximize shareholder value while managing the firm's financial risks...

 is the task of providing the funds for a corporation's activities (for small business
Small business
A small business is a business that is privately owned and operated, with a small number of employees and relatively low volume of sales. Small businesses are normally privately owned corporations, partnerships, or sole proprietorships...

, this is referred to as SME finance
SME finance
SME finance is the funding of small and medium sized enterprises, and represents a major function of the general business finance market – in which capital for different types of firms are supplied, acquired, and costed or priced...

). Corporate finance generally involves balancing risk and profitability, while attempting to maximize an entity's wealth and the value of its stock
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...

, and generically entails three interrelated decisions. In the first, "the investment decision", management must decide which "projects" (if any) to undertake. The discipline of capital budgeting
Capital budgeting
Capital budgeting is the planning process used to determine whether an organization's long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth pursuing...

 is devoted to this question, and may employ standard business valuation
Business valuation
Business valuation is a process and a set of procedures used to estimate the economic value of an owner’s interest in a business. Valuation is used by financial market participants to determine the price they are willing to pay or receive to consummate a sale of a business...

 techniques or even extend to real options valuation; see Financial modeling. The second, "the financing decision" relates to how these investments are to be funded: capital here is provided by shareholders, in the form of equity
Equity (finance)
In accounting and finance, equity is the residual claim or interest of the most junior class of investors in assets, after all liabilities are paid. If liability exceeds assets, negative equity exists...

 (privately or via an initial public offering
Initial public offering
An initial public offering or stock market launch, is the first sale of stock by a private company to the public. It can be used by either small or large companies to raise expansion capital and become publicly traded enterprises...

), creditor
Creditor
A creditor is a party that has a claim to the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property or service to the second party under the assumption that the second party will return an equivalent property or...

s, often in the form of bonds
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...

, and the firm's operations (cash flow
Cash flow
Cash flow is the movement of money into or out of a business, project, or financial product. It is usually measured during a specified, finite period of time. Measurement of cash flow can be used for calculating other parameters that give information on a company's value and situation.Cash flow...

). Short-term funding or working capital
Working capital
Working capital is a financial metric which represents operating liquidity available to a business, organization or other entity, including governmental entity. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Net working capital is...

 is mostly provided by banks extending a line of credit. The balance between these elements forms the company's capital structure
Capital structure
In finance, capital structure refers to the way a corporation finances its assets through some combination of equity, debt, or hybrid securities. A firm's capital structure is then the composition or 'structure' of its liabilities. For example, a firm that sells $20 billion in equity and $80...

. The third, "the dividend decision", requires management to determine whether any unappropriated profit is to be retained for future investment / operational requirements, or instead to be distributed to shareholders, and if so in what form. Short term financial management
Financial management
Financial management may refer to:* Managerial finance, a branch of finance that concerns itself with the managerial significance of finance techniques....

 is often termed "working capital management", and relates to cash-
Cash management
In United States banking, cash management, or treasury management, is a marketing term for certain services offered primarily to larger business customers...

, inventory
Inventory
Inventory means a list compiled for some formal purpose, such as the details of an estate going to probate, or the contents of a house let furnished. This remains the prime meaning in British English...

- and debtor
Debtor
A debtor is an entity that owes a debt to someone else. The entity may be an individual, a firm, a government, a company or other legal person. The counterparty is called a creditor...

s management. These areas often overlap with the firm's accounting function, however, financial accounting is more concerned with the reporting of historical financial information, while these financial decisions are directed toward the future of the firm.

Finance of public entities



Public finance describes finance as related to sovereign states and sub-national entities (states/provinces, counties, municipalities, etc.) and related public entities (e.g. school districts) or agencies. It is concerned with:
  • Identification of required expenditure of a public sector entity
  • Source(s) of that entity's revenue
  • The budgeting process
  • Debt issuance (municipal bond
    Municipal bond
    A municipal bond is a bond issued by a city or other local government, or their agencies. Potential issuers of municipal bonds includes cities, counties, redevelopment agencies, special-purpose districts, school districts, public utility districts, publicly owned airports and seaports, and any...

    s) for public works projects

Financial risk management



Financial risk management is the practice of creating and protecting economic value in a firm
Business
A business is an organization engaged in the trade of goods, services, or both to consumers. Businesses are predominant in capitalist economies, where most of them are privately owned and administered to earn profit to increase the wealth of their owners. Businesses may also be not-for-profit...

 by using financial instruments
Financial instruments
A financial instrument is a tradable asset of any kind, either cash; evidence of an ownership interest in an entity; or a contractual right to receive, or deliver, cash or another financial instrument....

 to manage exposure to risk
Risk
Risk is the potential that a chosen action or activity will lead to a loss . The notion implies that a choice having an influence on the outcome exists . Potential losses themselves may also be called "risks"...

, particularly credit risk
Credit risk
Credit risk is an investor's risk of loss arising from a borrower who does not make payments as promised. Such an event is called a default. Other terms for credit risk are default risk and counterparty risk....

 and market risk
Market risk
Market risk is the risk that the value of a portfolio, either an investment portfolio or a trading portfolio, will decrease due to the change in value of the market risk factors. The four standard market risk factors are stock prices, interest rates, foreign exchange rates, and commodity prices...

. (Other risk types include Foreign exchange, Shape, Volatility
Volatility (finance)
In finance, volatility is a measure for variation of price of a financial instrument over time. Historic volatility is derived from time series of past market prices...

, Sector, Liquidity, Inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...

 risks, etc.) It focuses on when and how to hedge
Hedge (finance)
A hedge is an investment position intended to offset potential losses that may be incurred by a companion investment.A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, many types of...

 using financial instruments; in this sense it overlaps with financial engineering. Similar to general risk management
Risk management
Risk management is the identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities...

, financial risk management requires identifying its sources, measuring it (see: Risk measure: Well known risk measures), and formulating plans to address these, and can be qualitative and quantitative. In the banking sector worldwide, the Basel Accords are generally adopted by internationally active banks for tracking, reporting and exposing operational, credit and market risks.

Financial economics


Financial economics is the branch of economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...

 studying the interrelation of financial variables
Variable (mathematics)
In mathematics, a variable is a value that may change within the scope of a given problem or set of operations. In contrast, a constant is a value that remains unchanged, though often unknown or undetermined. The concepts of constants and variables are fundamental to many areas of mathematics and...

, such as price
Price
-Definition:In ordinary usage, price is the quantity of payment or compensation given by one party to another in return for goods or services.In modern economies, prices are generally expressed in units of some form of currency...

s, interest rate
Interest rate
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...

s and shares, as opposed to those concerning the real economy. Financial economics concentrates on influences of real economic variables on financial ones, in contrast to pure finance. It centres on decision making
Decision making
Decision making can be regarded as the mental processes resulting in the selection of a course of action among several alternative scenarios. Every decision making process produces a final choice. The output can be an action or an opinion of choice.- Overview :Human performance in decision terms...

 under uncertainty
Uncertainty
Uncertainty is a term used in subtly different ways in a number of fields, including physics, philosophy, statistics, economics, finance, insurance, psychology, sociology, engineering, and information science...

 in the context of the financial markets, and the resultant economic and financial models. It essentially explores how rational investors
Homo economicus
Homo economicus, or Economic human, is the concept in some economic theories of humans as rational and narrowly self-interested actors who have the ability to make judgments toward their subjectively defined ends...

 would apply decision theory
Decision theory
Decision theory in economics, psychology, philosophy, mathematics, and statistics is concerned with identifying the values, uncertainties and other issues relevant in a given decision, its rationality, and the resulting optimal decision...

 to the problem of investment
Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...

. Here, the twin assumptions of rationality
Rational pricing
Rational pricing is the assumption in financial economics that asset prices will reflect the arbitrage-free price of the asset as any deviation from this price will be "arbitraged away"...

 and market efficiency lead to modern portfolio theory
Modern portfolio theory
Modern portfolio theory is a theory of investment which attempts to maximize portfolio expected return for a given amount of portfolio risk, or equivalently minimize risk for a given level of expected return, by carefully choosing the proportions of various assets...

 (the CAPM
Capital asset pricing model
In finance, the capital asset pricing model is used to determine a theoretically appropriate required rate of return of an asset, if that asset is to be added to an already well-diversified portfolio, given that asset's non-diversifiable risk...

), and to the Black Scholes theory for option valuation
Valuation of options
In finance, a price is paid or received for purchasing or selling options. This price can be split into two components.These are:* Intrinsic Value* Time Value-Intrinsic Value:...

; it further studies phenomena and models where these assumptions do not hold, or are extended. "Financial economics", at least formally, also considers investment under "certainty
Certainty
Certainty can be defined as either:# perfect knowledge that has total security from error, or# the mental state of being without doubtObjectively defined, certainty is total continuity and validity of all foundational inquiry, to the highest degree of precision. Something is certain only if no...

" (Fisher separation theorem
Fisher separation theorem
In economics, the Fisher separation theorem asserts that the objective of a corporation will be the maximization of its present value, regardless of the preferences of its shareholders. The theorem therefore separates management's "productive opportunities" from the entrepreneur's "market...

, "theory of investment value", Modigliani-Miller theorem
Modigliani-Miller theorem
The Modigliani–Miller theorem forms the basis for modern thinking on capital structure. The basic theorem states that, under a certain market price process , in the absence of taxes, bankruptcy costs, agency costs, and asymmetric information, and in an efficient market, the value of a firm is...

) and hence also contributes to corporate finance theory. Financial Econometrics
Financial econometrics
People working in the finance industry often use econometric techniques in a range of activities. For example in support of portfolio management, risk management and in the analysis of securities...

 is the branch of Financial Economics that uses econometric techniques to parameterize the relationships suggested.

Financial mathematics



Financial mathematics is a field of applied mathematics
Applied mathematics
Applied mathematics is a branch of mathematics that concerns itself with mathematical methods that are typically used in science, engineering, business, and industry. Thus, "applied mathematics" is a mathematical science with specialized knowledge...

, concerned with financial markets. The subject has a close relationship with the discipline of financial economics, which is concerned with much of the underlying theory. Generally, mathematical finance will derive, and extend, the mathematical
Mathematical model
A mathematical model is a description of a system using mathematical concepts and language. The process of developing a mathematical model is termed mathematical modeling. Mathematical models are used not only in the natural sciences and engineering disciplines A mathematical model is a...

 or numerical
Numerical analysis
Numerical analysis is the study of algorithms that use numerical approximation for the problems of mathematical analysis ....

 models suggested by financial economics. In terms of practice, mathematical finance also overlaps heavily with the field of computational finance
Computational finance
Computational finance, also called financial engineering, is a cross-disciplinary field which relies on computational intelligence, mathematical finance, numerical methods and computer simulations to make trading, hedging and investment decisions, as well as facilitating the risk management of...

 (also known as financial engineering). Arguably, these are largely synonymous, although the latter focuses on application, while the former focuses on modeling and derivation (see: Quantitative analyst
Quantitative analyst
A quantitative analyst is a person who works in finance using numerical or quantitative techniques. Similar work is done in most other modern industries, but the work is not always called quantitative analysis...

). The field is largely focused on the modelling of derivatives
Derivative (finance)
A derivative instrument is a contract between two parties that specifies conditions—in particular, dates and the resulting values of the underlying variables—under which payments, or payoffs, are to be made between the parties.Under U.S...

, although other important subfields include insurance mathematics
Actuarial science
Actuarial science is the discipline that applies mathematical and statistical methods to assess risk in the insurance and finance industries. Actuaries are professionals who are qualified in this field through education and experience...

 and quantitative portfolio problems
Portfolio (finance)
Portfolio is a financial term denoting a collection of investments held by an investment company, hedge fund, financial institution or individual.-Definition:The term portfolio refers to any collection of financial assets such as stocks, bonds and cash...

. See Outline of finance: Mathematical tools; Outline of finance: Derivatives pricing.

Experimental finance


Experimental finance
Experimental finance
The goals of experimental finance are to establish different market settings and environments to observe experimentally and analyze agents' behavior and the resulting characteristics of trading flows, information diffusion and aggregation, price setting mechanism and returns processes...

 aims to establish different market settings and environments to observe experimentally and provide a lens through which science can analyze agents' behavior and the resulting characteristics of trading flows, information diffusion and aggregation, price setting mechanisms, and returns processes. Researchers in experimental finance can study to what extent existing financial economics theory makes valid predictions, and attempt to discover new principles on which such theory can be extended. Research may proceed by conducting trading simulations or by establishing and studying the behaviour of people in artificial competitive market-like settings.

Behavioral finance


Behavioral Finance
Behavioral finance
Behavioral economics and its related area of study, behavioral finance, use social, cognitive and emotional factors in understanding the economic decisions of individuals and institutions performing economic functions, including consumers, borrowers and investors, and their effects on market...

 studies how the psychology of investors or managers affects financial decisions and markets. Behavioral finance has grown over the last few decades to become central to finance.

Behavioral finance includes such topics as:
  1. Empirical studies that demonstrate significant deviations from classical theories.
  2. Models of how psychology affects trading and prices
  3. Forecasting based on these methods.
  4. Studies of experimental asset markets and use of models to forecast experiments.


A strand of behavioral finance has been dubbed Quantitative Behavioral Finance, which uses mathematical and statistical methodology to understand behavioral biases in conjunction with valuation. Some of this endeavor has been led by Gunduz Caginalp
Gunduz Caginalp
Gunduz Caginalp is a Turkish mathematician, currently a professor at the University of Pittsburgh.He received his PhD from Cornell University in 1978...

 (Professor of Mathematics and Editor of Journal of Behavioral Finance
Journal of Behavioral Finance
The Journal of Behavioral Finance is a peer-reviewed journal that publishes research related to the field of behavioral finance. It formerly published as The Journal of Psychology and Financial Markets....

 during 2001-2004) and collaborators including Vernon Smith
Vernon L. Smith
Vernon Lomax Smith is professor of economics at Chapman University's Argyros School of Business and Economics and School of Law in Orange, California, a research scholar at George Mason University Interdisciplinary Center for Economic Science, and a Fellow of the Mercatus Center, all in Arlington,...

 (2002 Nobel Laureate in Economics), David Porter, Don Balenovich, Vladimira Ilieva, Ahmet Duran). Studies by Jeff Madura, Ray Sturm and others have demonstrated significant behavioral effects in stocks and exchange traded funds. Among other topics, quantitative behavioral finance studies behavioral effects together with the non-classical assumption of the finiteness of assets.

Intangible Asset Finance


Intangible asset finance is the area of finance that deals with intangible assets such as patents, trademarks, goodwill, reputation, etc.

Related professional qualifications


There are several related professional qualifications, that can lead to the field:
  • Generalist Finance qualifications:
    • Degrees: Masters degree in Finance (MSF), Master of Financial Economics
      Master of Financial Economics
      A master’s degree in financial economics provides an understanding of theoretical finance and the underlying economic framework. The degree is postgraduate, and may incorporate a thesis or research component. Programs are often a joint offering by the business school and the economics department;...

      , Master of Finance & Control (MFC), Master Financial Manager (MFM), Master of Financial Administration (MFA)
    • Certifications: Chartered Financial Analyst
      Chartered Financial Analyst
      The Chartered Financial Analyst Program is a graduate level self-study program offered by the CFA Institute to investment and financial professionals...

       (CFA), Certified Treasury Professional
      Certified Treasury Professional
      The Certified Treasury Professional is a certification awarded by the Association for Financial Professionals of Bethesda, Maryland to individuals who meet eligibility criteria and demonstrate current competency standards measured through the CTP examination.Once a CTP, certificants must abide by...

       (CTP), Certified Valuation Analyst (CVA), Certified International Investment Analyst
      Certified International Investment Analyst
      Certified International Investment Analyst is a global finance designation offered by the Association of Certified International Investment Analysts to financial professionals; candidates may be financial analysts, portfolio managers or investment advisors...

       (CIIA),, Association of Corporate Treasurers
      Association of Corporate Treasurers
      The Association of Corporate Treasurers is the only British professional body specialising in the profession of corporate treasury. Founded in 1979, it is both an examining body, providing a wide range of qualifications for those working in treasury, risk and corporate finance, and a membership...

       (ACT), Certified Market Analyst (CMA/FAD) Dual Designation, Corporate Finance Qualification (CF), Chartered Alternative Investment Analyst
      Chartered Alternative Investment Analyst
      Chartered Alternative Investment Analyst is a professional designation offered by the CAIA Association to investment professionals who complete a course of study and pass two examinations. The "alternative investments" industry is characterized as dealing with asset classes and investments other...

       (CAIA)
  • Quantitative Finance qualifications: Master of Financial Engineering (MSFE), Master of Quantitative Finance
    Master of Quantitative Finance
    A masters degree in quantitative finance concerns the application of mathematical methods to the solution of problems in financial economics. There are several like-titled degrees which may further focus on financial engineering, financial risk management, computational finance and/or mathematical...

     (MQF), Master of Computational Finance (MCF), Master of Financial Mathematics (MFM), Certificate in Quantitative Finance (CQF).
  • Accountancy qualifications:
    • Qualified accountant: Chartered Accountant
      Chartered Accountant
      Chartered Accountants were the first accountants to form a professional body, initially established in Britain in 1854. The Edinburgh Society of Accountants , the Glasgow Institute of Accountants and Actuaries and the Aberdeen Society of Accountants were each granted a royal charter almost from...

       (ACA - UK certification / CA - certification in Commonwealth countries), Chartered Certified Accountant
      Chartered Certified Accountant
      Chartered Certified Accountant was historically seen as a British qualified accountant designation awarded by the Association of Chartered Certified Accountants . However, although ACCA is UK based, it is a global body for professional accountants with 147,000 qualified members and 424,000...

       (ACCA
      Association of Chartered Certified Accountants
      Founded in 1904, the Association of Chartered Certified Accountants is the global body for professional accountants offering the Chartered Certified Accountant qualification . it is one of the largest and fastest-growing global accountancy bodies with 147,000 members and 424,000 students in 170...

      , UK certification), Certified Public Accountant
      Certified Public Accountant
      Certified Public Accountant is the statutory title of qualified accountants in the United States who have passed the Uniform Certified Public Accountant Examination and have met additional state education and experience requirements for certification as a CPA...

       (CPA, US certification), ACMA/FCMA ( Associate/Fellow Chartered Management Accountant) from Chartered Institute of Management Accountant(CIMA), UK.
    • Non-statutory qualifications: Chartered Cost Accountant
      Chartered Cost Accountant
      Chartered Cost Accountant is a cost accounting or cost control professional designation offered by the American Academy of Financial Management. The CCA is a Graduate Post Nominal that is only available for accountants with an accredited degree, MBA, CPA, Chartered Accountant License, law degree,...

       CCA Designation from AAFM
      American Academy of Financial Management
      The American Academy of Financial Management is a USA-based board of standards, certifying body, and accreditation council dedicated to the finance sector and management professionals....

  • Business qualifications: Master of Business Administration
    Master of Business Administration
    The Master of Business Administration is a :master's degree in business administration, which attracts people from a wide range of academic disciplines. The MBA designation originated in the United States, emerging from the late 19th century as the country industrialized and companies sought out...

     (MBA), Master of Management
    Master of Management
    The Master of Management is a post-graduate master’s degree awarded to students who normally complete a one to two year program of graduate level coursework in business management at an accredited academic institution. As the program is designed for students interested in entering leadership...

     (MM), Master of Commerce
    Master of Commerce
    Master of Commerce is a postgraduate Masters Degree focusing on commerce-, management- and economics-related subjects. Like the undergraduate Bachelor of Commerce, the degree is offered in Commonwealth nations.-Structure:The Master of Commerce typically requires one year of full-time study...

     (M.Comm), Master of Science in Management
    Master of Science in Management
    Master of Science in Management, abbreviated MSc or MSM, is a Master of Science academic degree that is common throughout the United States and Europe. It is similar to the MBA degree, and often requires a dissertation before a graduate is admitted to it. The MSc is a research-oriented program...

     (MSM), Doctor of Business Administration
    Doctor of Business Administration
    The degree of Doctor of Business Administration, abbreviated, or and equivalent to , is a research doctorate in business administration. The D.B.A...

     (DBA)

External links


  • OECD work on financial markets Observation of UK Finance Market
  • Wharton Finance Knowledge Project - aimed to offer free access to finance knowledge for students, teachers, and self-learners.
  • Professor Aswath Damodaran (New York University Stern School of Business
    New York University Stern School of Business
    The Leonard N. Stern School of Business is New York University's business school. It was established in 1900 as the NYU School of Commerce, Accounts and Finance. In 1988 it was named after Leonard N. Stern, an alumnus and benefactor of the school...

    ) - provides resources covering three areas in finance: corporate finance, valuation and investment management and syndicate finance.